Adoption of LIFO (Last In First Out) Inventory Methods
Gallagher, Flynn & Company, LLP helps clients experiencing rising production and inventory acquisition costs evaluate the benefits of adopting LIFO inventory methods.
Use of LIFO can significantly accelerate inventory deductions in times of rising inventory costs. Major benefits are often realized immediately, in the first year of adoption. An essentially permanent tax benefit is possible for a company with stable or increasing inventory levels amid even inconsistent periods of cost inflation.
Recent changes have made LIFO much simpler to use. So-called “IPIC” methods using published inflation indexes simplify annual calculations and may allow favorable inventory adjustments even if management has controlled or hedged actual costs.
Election to adopt LIFO and to abandon LIFO are both automatic, providing flexibility that reduces the risk that LIFO will not continue to be beneficial. LIFO must be used for both tax purposes and in primary financial statements, but FIFO inventory calculations can be disclosed in financial statement footnotes and are allowed for many banking and regulatory purposes.
Alternatively, a company may determine inflation adjustments using internally developed indexes.
LIFO is another tax planning idea offering significant benefit in the right circumstances. Gallagher, Flynn & Company, LLP can help you evaluate whether LIFO will save you taxes.