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<\/p>\nYou have choices when it comes to reporting inventory costs. One popular technique \u2014 the last-in, first-out (LIFO) method \u2014 assumes that merchandise is sold in the reverse order it was acquired or produced. That is, it allocates the most recent costs to the cost of sales. Although this method is often preferred for tax purposes, internal accounting personnel may be hesitant to use it for various reasons. <\/p>\n
Tax benefits<\/p>\n
Assuming your inventory costs generally increase over time, LIFO offers a definite tax advantage over other inventory reporting methods. By allocating the most recent \u2014 and, therefore, higher \u2014 costs first, LIFO maximizes your cost of goods sold, which minimizes your taxable income. <\/p>\n
In contrast, the first-in, first-out (FIFO) method assumes that merchandise is sold in the order it was acquired or produced. Thus, the cost of goods sold is based on older \u2014 and often lower \u2014 prices.<\/p>\n
Financial reporting challenges <\/p>\n
Before you jump headfirst into using LIFO, it\u2019s important to recognize that it\u2019s not permitted under International Financial Reporting Standards. The approach also involves sophisticated record keeping and calculations. <\/p>\n
For example, the \u201cLIFO conformity rule\u201d generally requires you to use the same inventory accounting method for tax and financial statement purposes. Switching to LIFO may reduce your tax bill, but it could also depress your current earnings and reduce the value of inventories on your balance sheet, thus giving the appearance of a weaker financial position. <\/p>\n
LIFO also can create a problem if your inventory levels are declining. As higher inventory costs are used up, you\u2019ll need to start dipping into lower-cost \u201clayers\u201d of inventory, triggering taxes on \u201cphantom income\u201d that the LIFO method previously has allowed you to defer.<\/p>\n
Moreover, if a C corporation elects S corporation status, the business must include a \u201cLIFO recapture amount\u201d in income for the C corporation\u2019s last tax year. The recapture amount is the excess of your inventory\u2019s value using FIFO over its value using LIFO. Fortunately, you can spread out the tax payments over four years in equal, interest-free installments.<\/p>\n
One of the biggest challenges in using LIFO is the need to measure changes in inventory costs. If you currently use LIFO, you may be able to enjoy additional savings by electing to use the inventory price index computation method. It may enable you to reduce administrative costs \u2014 and it might even generate greater tax benefits \u2014 if you rely on government indexes to calculate LIFO values rather than developing an internal index.<\/p>\n
Right for you?<\/p>\n
If you\u2019re contemplating a switch to LIFO, there are various issues to address and forms to complete. Contact us to help decide whether it\u2019s right for your business. <\/p>\n
\u00a9 2018
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You have choices when it comes to reporting inventory costs. One popular technique \u2014 the last-in, first-out (LIFO) method \u2014 assumes that merchandise is sold in the reverse order it was acquired or produced. That is, it allocates the most recent costs to the cost of sales. Although this method is often preferred for tax … Continue reading “LIFO lessons learned”<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-872","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/872","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/comments?post=872"}],"version-history":[{"count":1,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/872\/revisions"}],"predecessor-version":[{"id":873,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/posts\/872\/revisions\/873"}],"wp:attachment":[{"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/media?parent=872"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/categories?post=872"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/wp-json\/wp\/v2\/tags?post=872"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}