Code of Federal Regulations · Section
§ 1.471-8 — -8 Inventories Of Retail Merchants
26 C.F.R. § 1.471-8
(a) In general. A taxpayer that is a retail merchant may use the retail inventory method of accounting described in this section. The retail inventory method uses a formula to convert the retail selling price of ending inventory to an approximation of cost (retail cost method) or an approximation of lower of cost or market (retail LCM method). A taxpayer may use the retail inventory method instead of valuing inventory at cost under § 1.471-3 or lower of cost or market under § 1.471-4.
(b) Computation—(1) In general. A taxpayer computes the value of ending inventory under the retail inventory method by multiplying a cost complement by the retail selling prices of the goods on hand at the end of the taxable year.
(2) Cost complement—(i) In general. The cost complement is a ratio computed as follows:
(A) The numerator is the value of beginning inventory plus the cost (as determined under § 1.471-3, except as otherwise provided in this section) of goods purchased during the taxable year.
(B) The denominator is the retail selling prices of beginning inventory plus the retail selling prices of goods purchased during the year (that is, the bona fide retail selling prices of the items at the time acquired), adjusted for all permanent markups and markdowns, including markup and markdown cancellations and corrections. The denominator is not adjusted for temporary markups or markdowns.
(ii) Vendor allowances required to reduce only cost of goods sold. A taxpayer may not reduce the numerator of the cost complement by the amount of an allowance, discount, or price rebate that is required under § 1.471-3(e) to reduce only cost of goods sold.
(3) Additional rules for cost complement for retail LCM method—(i) In general—(A) Margin protection payments. A taxpayer using the retail LCM method may not reduce the numerator of the cost complement by the amount of an allowance, discount, or price rebate that is related to or intended to compensate for a permanent reduction in the taxpayer's retail selling price of inventory (a margin protection payment).
(B) Markdowns. A taxpayer using the retail LCM method does not adjust the denominator of the cost complement for markdowns (and markdown cancellations or corrections). Markups must be reduced by the markdowns made to cancel or correct them.
(ii) Alternative methods for computing cost complement—(A) In general. In lieu of the method described in paragraph (b)(3)(i) of this section, a taxpayer using the retail LCM method may compute the cost complement using one of the alternative methods described in this paragraph (b)(3)(ii). A taxpayer using an alternative method under this paragraph (b)(3)(ii) must use that method for all cost complements.
(B) Adjust numerator and denominator. A taxpayer using the retail LCM method may reduce the numerator of the cost complement by the amount of all margin protection payments if the taxpayer also reduces the denominator of the cost complement by the amount of the permanent reduction in retail selling price to which the margin protection payments relate (related markdowns).
(C) Deemed adjustment to denominator. A taxpayer using the retail LCM method that is able to determine the amount of all margin protection payments but cannot determine the amount of the related markdowns may reduce the numerator of the cost complement by the amount of all margin protection payments if the taxpayer also reduces the denominator by the amount that, in conjunction with the reduction of the numerator for the margin protection payments, maintains what would have been the cost complement percentage before taking into account the margin protection payment and the related markdown. A taxpayer that can determine the amount of a related markdown but not the associated margin protection payments may not use this method to compute an adjustment to the numerator.
(iii) Statistical sampling. A taxpayer using the retail LCM method may use statistical sampling in accordance with Rev. Proc. 2011-42 or any successor (see § 601.601(d) of this chapter), in conjunction with any method of computing the cost complement described in this paragraph (b)(3), to determine the amount of margin protection payments and related markdowns. A taxpayer using statistical sampling must use it for all margin protection payments and related markdowns associated with the inventory items valued by a particular cost complement, but is not required to use it for every cost complement.
(4) Ending inventory retail selling prices. A taxpayer must include all permanent markups and markdowns but may not include temporary markups or markdowns in determining the retail selling prices of goods on hand at the end of the taxable year. A taxpayer may not include a markdown that is not an actual reduction of retail selling price.
(c) Special rules for LIFO taxpayers. A taxpayer using the last-in, first-out (LIFO) inventory method with the retail inventory method uses the retail cost method. See § 1.472-1(k) for additional adjustments for a taxpayer using the LIFO inventory method with the retail cost method.
(d) Scope of retail inventory method. A taxpayer may use the retail inventory method to value ending inventory for a department, a class of goods, or a stock-keeping unit. A taxpayer maintaining more than one department or dealing in classes of goods with different percentages of gross profit must compute cost complements separately for each department or class of goods.
(e) Examples. The following examples illustrate the rules of this section:
(i) R, a retail merchant who uses the retail LCM method and uses a calendar taxable year, has no beginning inventory in 2012. R purchases 40 tables during 2012 for $60 each for a total of $2,400. R offers the tables for sale at $100 each for an aggregate retail selling price of $4,000. R does not sell any tables at a price of $100, so R permanently marks down the retail selling price of its tables to $90 each. As a result of the $10 markdown, R's supplier provides R a $6 per table margin protection payment. R sells 25 tables during 2012 and has 15 tables in ending inventory at the end of 2012.
(ii) Under paragraph (b)(2)(i)(A) of this section, the numerator of the cost complement is the aggregate cost of the tables, $2,400. Under paragraph (b)(3)(i)(A) of this section, R may not reduce the numerator of the cost complement by the amount of the margin protection payment. Under paragraph (b)(2)(i)(B) of this section, the denominator of the cost complement is the aggregate of the bona fide retail selling prices of all the tables at the time acquired, $4,000. Under paragraph (b)(3)(i)(B) of this section, R does not adjust the denominator of the cost complement for the markdown. Therefore, R's cost complement is $2,400/$4,000, or 60%.
(iii) Under paragraph (b)(4) of this section, R includes the permanent markdown in determining year-end retail selling prices. Therefore, the aggregate retail selling price of R's ending table inventory is $1,350 (15 * $90). Approximating LCM under the retail method, the value of R's ending table inventory is $810 (60% * $1,350).
(i) The facts are the same as in Example 1, except that R permanently reduces the retail selling price of all 40 tables to $50 per unit and the 15 tables on hand at the end of the year are marked for sale at that price. The additional $40 markdown is unrelated to a margin protection payment or other allowance.
(ii) Under paragraph (b)(3)(i)(B) of this section, R does not adjust the denominator of the cost complement for the markdown. Therefore, R's cost complement is $2,400/$4,000, or 60%.
(iii) Under paragraph (b)(4) of this section, R includes the permanent markdowns in determining year-end retail selling prices. Therefore, the aggregate retail selling price of R's ending inventory is $750 (15 * $50). Approximating LCM under the retail method, the value of R's ending inventory is $450 (60% * $750).
(i) The facts are the same as in Example 1, except that R computes the cost complement using the alternative method under paragraph (b)(3)(ii)(B) of this section.
(ii) R reduces the numerator of the cost complement by the margin protection payments of $240 ($6 * 40) and reduces the denominator of the cost complement by the related markdowns of $400 ($10 * 40). Therefore, R's cost complement is $2,160/$3,600, or 60%.
(iii) Under paragraph (b)(4) of this section, R includes the permanent markdown in determining year-end retail selling prices. Therefore, the aggregate retail selling price of R's ending table inventory is $1,350 (15 * $90). Approximating LCM under the retail method, the value of R's ending table inventory is $810 (60% * $1,350).
(i) The facts are the same as in Example 1, except that R cannot determine the amount of its related markdowns and computes the cost complement using the alternative method under paragraph (b)(3)(ii)(C) of this section.
(ii) R reduces the numerator of the cost complement by the margin protection payments of $240 ($6 * 40). R reduces the denominator of the cost complement by the amount that, in conjunction with the reduction in the numerator, maintains the cost complement percentage before taking into account the margin protection payments and the related markdowns. R's original cost complement was 60% ($2,400/$4,000). The numerator of R's new cost complement is $2,160 ($2,400−$240). Therefore, R reduces the denominator by $400, which maintains the cost complement of 60% ($2,160/$3,600).
(iii) Under paragraph (b)(4) of this section, R includes the permanent markdowns in determining year-end retail selling prices. Therefore, the aggregate retail selling price of R's ending table inventory is $1,350 (15 * $90). Approximating LCM under the retail method, the value of R's ending table inventory is $810 (60% * $1,350).
(i) The facts are the same as in Example 1, except that R uses the LIFO inventory method. R must value inventories at cost and, under paragraph (c) of this section, uses the retail cost method.
(ii) Under paragraph (b)(2)(i)(A) of this section, R reduces the numerator of the cost complement by the amount of the margin protection payment. Under paragraph (b)(2)(i)(B) of this section, R includes the permanent markdown in the denominator of the cost complement. Therefore, R's cost complement is $2,160/$3,600, or 60%.
(iii) Under paragraph (b)(4) of this section, R includes the permanent markdown in determining year-end retail selling prices. Therefore, the aggregate retail selling price of R's ending inventory is $1,350 (15 * $90). Approximating cost under the retail method, the value of R's ending inventory is $810 (60% * $1,350).
(f) Effective/applicability date. This section applies to taxable years beginning after December 31, 2014. For taxable years beginning before January 1, 2015, see § 1.471-8 as contained in 26 CFR part 1, revised April 1, 2014.
Authorizing Statute
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Rules and regulations26 U.S.C. § 7805
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Advanced manufacturing production credit26 U.S.C. § 45X
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Alcohol, etc., used as fuel26 U.S.C. § 40
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Gross income defined26 U.S.C. § 61
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Transfers of excess pension assets to retiree health accounts26 U.S.C. § 420
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Partial exclusion for gain from certain small business stock26 U.S.C. § 1202
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Tax treatment of stripped bonds26 U.S.C. § 1286
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Current taxation of income from qualified electing funds26 U.S.C. § 1293
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Imposition of tax on certain foreign procurement26 U.S.C. § 5000C
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Returns regarding payments of interest26 U.S.C. § 6049
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Signing of returns and other documents26 U.S.C. § 6061
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General requirement of return, statement, or list26 U.S.C. § 6011
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Income from discharge of indebtedness26 U.S.C. § 108
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Indian general welfare benefits26 U.S.C. § 139E
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Bonds must be registered to be tax exempt; other requirements26 U.S.C. § 149
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Trade or business expenses26 U.S.C. § 162
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Accelerated cost recovery system26 U.S.C. § 168
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Amortizable bond premium26 U.S.C. § 171
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Golden parachute payments26 U.S.C. § 280G
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Distributions of stock and stock rights26 U.S.C. § 305
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Transfer to corporation controlled by transferor26 U.S.C. § 351
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Special rules for long-term contracts26 U.S.C. § 460
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Determination of basis of partner’s interest26 U.S.C. § 705
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Taxes of foreign countries and of possessions of United States26 U.S.C. § 901
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Controlled foreign corporations; United States persons26 U.S.C. § 957
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New energy efficient home credit26 U.S.C. § 45L
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2-percent floor on miscellaneous itemized deductions26 U.S.C. § 67
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Certain death benefits26 U.S.C. § 101
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Qualified business income26 U.S.C. § 199A
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Installment method26 U.S.C. § 453
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Certain payments for the use of property or services26 U.S.C. § 467
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Partners, not partnership, subject to tax26 U.S.C. § 701
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Extent of recognition of gain or loss on distribution26 U.S.C. § 731
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Capitalization of certain policy acquisition expenses26 U.S.C. § 848
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Special rules for determining source26 U.S.C. § 863
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Income of foreign governments and of international organizations26 U.S.C. § 892
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Definitions and special rules26 U.S.C. § 6241
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Computation and payment of tax26 U.S.C. § 1503
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Adjusted gross income defined26 U.S.C. § 62
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Treatment of loans with below-market interest rates26 U.S.C. § 7872
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Basis to distributees26 U.S.C. § 358
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Minimum participation standards26 U.S.C. § 410
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Other definitions and special rules26 U.S.C. § 860G
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Adjustments required by changes in method of accounting26 U.S.C. § 481
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Definitions26 U.S.C. § 7701
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Insurance income26 U.S.C. § 953
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Returns relating to actions affecting basis of specified securities26 U.S.C. § 6045B
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Information relating to certain trusts and annuity plans26 U.S.C. § 6047
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Enhanced oil recovery credit26 U.S.C. § 43
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Energy efficient commercial buildings deduction26 U.S.C. § 179D
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Redemption through use of related corporations26 U.S.C. § 304
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Certain stock purchases treated as asset acquisitions26 U.S.C. § 338
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Special limitations on certain excess credits, etc.26 U.S.C. § 383
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Optional treatment of elective deferrals as Roth contributions26 U.S.C. § 402A
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General rule for taxable year of inclusion26 U.S.C. § 451
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Qualified ABLE programs26 U.S.C. § 529A
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Charitable remainder trusts26 U.S.C. § 664
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Nonrecognition of gain or loss on contribution26 U.S.C. § 721
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Investment of earnings in United States property26 U.S.C. § 956
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Definitions and special rule26 U.S.C. § 1377
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Relief from joint and several liability on joint return26 U.S.C. § 6015
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Return of S corporation26 U.S.C. § 6037
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Notice of certain transfers to foreign persons26 U.S.C. § 6038B
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Information at source26 U.S.C. § 6041
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Imposition of accuracy-related penalty on underpayments26 U.S.C. § 6662
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Tax imposed26 U.S.C. § 1
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Railroad track maintenance credit26 U.S.C. § 45G
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Zero-emission nuclear power production credit26 U.S.C. § 45U
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Rehabilitation credit26 U.S.C. § 47
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Clean electricity investment credit26 U.S.C. § 48E
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Special rules26 U.S.C. § 52
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Election to expense certain depreciable business assets26 U.S.C. § 179
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Individual retirement accounts26 U.S.C. § 408
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Special rules for nondealers26 U.S.C. § 453A
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Deductions limited to amount at risk26 U.S.C. § 465
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Exemption from tax on corporations, certain trusts, etc.26 U.S.C. § 501
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Definition of regulated investment company26 U.S.C. § 851
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Source rules for personal property sales26 U.S.C. § 865
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Tax on nonresident alien individuals26 U.S.C. § 871
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Foreign base company income26 U.S.C. § 954
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S corporation defined26 U.S.C. § 1361
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Definitions26 U.S.C. § 1402
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Distributions of property26 U.S.C. § 301
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Life insurance contract defined26 U.S.C. § 7702
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Previously-owned clean vehicles26 U.S.C. § 25E
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Electricity produced from certain renewable resources, etc.26 U.S.C. § 45
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Clean fuel production credit26 U.S.C. § 45Z
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Taxation of employee annuities26 U.S.C. § 403
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Last-in, first-out inventories26 U.S.C. § 472
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Allocation of income and deductions among taxpayers26 U.S.C. § 482
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Definitions applicable to subparts A, B, C, and D26 U.S.C. § 643
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Taxable years of partner and partnership26 U.S.C. § 706
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Disposition of investment in United States real property26 U.S.C. § 897
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Administrative adjustment request by partnership26 U.S.C. § 6227
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Citizens or residents of the United States living abroad26 U.S.C. § 911
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Residence and source rules involving possessions26 U.S.C. § 937
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Rules relating to expatriated entities and their foreign parents26 U.S.C. § 7874
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Regulations26 U.S.C. § 1502
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Capitalization and inclusion in inventory costs of certain expenses26 U.S.C. § 263A
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Foreign corporations26 U.S.C. § 367
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Roth IRAs26 U.S.C. § 408A
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Minimum vesting standards26 U.S.C. § 411
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Partner’s distributive share26 U.S.C. § 704
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Unrealized receivables and inventory items26 U.S.C. § 751
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Taxation of residual interests26 U.S.C. § 860C
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Exclusions from gross income26 U.S.C. § 883
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Income affected by treaty26 U.S.C. § 894
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Other definitions and special rules26 U.S.C. § 989
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Special rules26 U.S.C. § 1474
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Returns of brokers26 U.S.C. § 6045
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Information returns of tax return preparers26 U.S.C. § 6060
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Authority to make credits or refunds26 U.S.C. § 6402
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Failure by individual to pay estimated income tax26 U.S.C. § 6654
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Interest on certain home mortgages26 U.S.C. § 25
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Credit for qualified commercial clean vehicles26 U.S.C. § 45W
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Interest on State and local bonds26 U.S.C. § 103
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Qualified lessee construction allowances for short-term leases26 U.S.C. § 110
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Losses26 U.S.C. § 165
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Charitable, etc., contributions and gifts26 U.S.C. § 170
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Incentive stock options26 U.S.C. § 422
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Deemed paid credit for subpart F inclusions26 U.S.C. § 960
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Election of mark to market for marketable stock26 U.S.C. § 1296
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Returns relating to certain life insurance contract transactions26 U.S.C. § 6050Y
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Clean vehicle credit26 U.S.C. § 30D
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Credit for carbon oxide sequestration26 U.S.C. § 45Q
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Amount of credit26 U.S.C. § 46
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Advanced manufacturing investment credit26 U.S.C. § 48D
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Arbitrage26 U.S.C. § 148
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Amortization of goodwill and certain other intangibles26 U.S.C. § 197
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Interest on education loans26 U.S.C. § 221
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Disallowance of certain entertainment, etc., expenses26 U.S.C. § 274
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Qualifications for tax credit employee stock ownership plans26 U.S.C. § 409
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Unrelated debt-financed income26 U.S.C. § 514
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Rules for allocation of basis26 U.S.C. § 755
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Rules for certain reserves26 U.S.C. § 807
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Special rules in case of foreign oil and gas income26 U.S.C. § 907
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Basis of property acquired from a decedent26 U.S.C. § 1014
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Special rules26 U.S.C. § 1298
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Definitions26 U.S.C. § 3401
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Extension of time for filing returns26 U.S.C. § 6081
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Renumbered § 45C]26 U.S.C. § 28
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Credit for production of clean hydrogen26 U.S.C. § 45V
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Energy credit26 U.S.C. § 48
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Limitation on credit26 U.S.C. § 904
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Qualified pension, profit-sharing, and stock bonus plans26 U.S.C. § 401
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Dependent care assistance programs26 U.S.C. § 129
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Special rules for nuclear decommissioning costs26 U.S.C. § 468A
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Mark to market accounting method for dealers in securities26 U.S.C. § 475
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Basis of distributed property other than money26 U.S.C. § 732
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Straddles26 U.S.C. § 1092
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Qualified electing fund26 U.S.C. § 1295
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Averaging of farm income26 U.S.C. § 1301
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Withholdable payments to foreign financial institutions26 U.S.C. § 1471
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Definitions26 U.S.C. § 1504
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Basis information to persons acquiring property from decedent26 U.S.C. § 6035
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Information with respect to certain foreign-owned corporations26 U.S.C. § 6038A
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Returns relating to cash received in trade or business, etc.26 U.S.C. § 6050I
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Credit for increasing research activities26 U.S.C. § 41
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Definitions and special rules26 U.S.C. § 150
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Passive activity losses and credits limited26 U.S.C. § 469
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Certain expenses for which credits are allowable26 U.S.C. § 280C
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Assumption of liability26 U.S.C. § 357
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Complete liquidations of subsidiaries26 U.S.C. § 332
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Distribution of stock and securities of a controlled corporation26 U.S.C. § 355
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Period for computation of taxable income26 U.S.C. § 441
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General rule for taxable year of deduction26 U.S.C. § 461
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Special rules for modified guaranteed contracts26 U.S.C. § 817A
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Treatment of variable contracts26 U.S.C. § 817
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Certain reinsurance agreements26 U.S.C. § 845
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Failure to file notice of redetermination of foreign tax26 U.S.C. § 6689
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Branch transactions26 U.S.C. § 987
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Qualified zone property defined26 U.S.C. § 1397D
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Withholdable payments to other foreign entities26 U.S.C. § 1472
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Liquidating, etc., transactions26 U.S.C. § 6043
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Verification of returns26 U.S.C. § 6065
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Mode or time of collection26 U.S.C. § 6302
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Transfer of certain credits26 U.S.C. § 6418
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American Opportunity and Lifetime Learning credits26 U.S.C. § 25A
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Refundable credit for coverage under a qualified health plan26 U.S.C. § 36B
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Clean electricity production credit26 U.S.C. § 45Y
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Other special rules26 U.S.C. § 50
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Treatment of community income26 U.S.C. § 66
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Basis to corporations26 U.S.C. § 362
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Election of taxable year other than required taxable year26 U.S.C. § 444
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Transactions between partner and partnership26 U.S.C. § 707
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Special allocation rules for certain asset acquisitions26 U.S.C. § 1060
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Discounted unpaid losses defined26 U.S.C. § 846
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Definitions and special rules26 U.S.C. § 864
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Capital asset defined26 U.S.C. § 1221
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Interest on tax deferral26 U.S.C. § 1291
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Passive foreign investment company26 U.S.C. § 1297
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Withholding of tax on nonresident aliens26 U.S.C. § 1441
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Returns as to interests in foreign partnerships26 U.S.C. § 6046A
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State and local income tax refunds26 U.S.C. § 6050E
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Returns relating to exchanges of certain partnership interests26 U.S.C. § 6050K
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Returns relating to higher education tuition and related expenses26 U.S.C. § 6050S
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Reporting of health insurance coverage26 U.S.C. § 6055
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Low-income housing credit26 U.S.C. § 42
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New markets tax credit26 U.S.C. § 45D
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Definitions and special rules26 U.S.C. § 414
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Qualified asset account; limitation on additions to account26 U.S.C. § 419A
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General rule for methods of accounting26 U.S.C. § 446
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Interest on certain deferred payments26 U.S.C. § 483
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Reserves for losses on loans of banks26 U.S.C. § 585
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Certain revocable trusts treated as part of estate26 U.S.C. § 645
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Insurance company taxable income26 U.S.C. § 832
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Income from sources within the United States26 U.S.C. § 861
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Treatment of certain foreign currency transactions26 U.S.C. § 988
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Functional currency26 U.S.C. § 985
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Other definitions and special rules26 U.S.C. § 1275
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Election to extend time for payment of tax on undistributed earnings26 U.S.C. § 1294
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Requirement to maintain minimum essential coverage26 U.S.C. § 5000A
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Returns by exempt organizations26 U.S.C. § 6033
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Information with respect to foreign financial assets26 U.S.C. § 6038D
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Returns relating to the cancellation of indebtedness by certain entities26 U.S.C. § 6050P
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Identifying numbers26 U.S.C. § 6109
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Elective payment of applicable credits26 U.S.C. § 6417
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Certain fringe benefits26 U.S.C. § 132
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Dependent defined26 U.S.C. § 152
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Interest26 U.S.C. § 163
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Bad debts26 U.S.C. § 166
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Special rules for credits and deductions26 U.S.C. § 642
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General rule for inventories26 U.S.C. § 471
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Political organizations26 U.S.C. § 527
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Special rules applicable to sections 661 and 66226 U.S.C. § 663
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Allowance of deductions and credits26 U.S.C. § 874
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Branch profits tax26 U.S.C. § 884
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Tax imposed on certain built-in gains26 U.S.C. § 1374
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Foreign tax-exempt organizations26 U.S.C. § 1443
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Valuation tables26 U.S.C. § 7520
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Losses on small business stock26 U.S.C. § 1244
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Distributions26 U.S.C. § 1368
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Definitions26 U.S.C. § 1473
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Information with respect to certain fines, penalties, and other amounts26 U.S.C. § 6050X
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Failure by corporation to pay estimated income tax26 U.S.C. § 6655