Press Room: Article

June 13, 2011

Using LIFO to Ease the Sting of Inflation

Is your business affected by rising oil or other commodity prices? If so, you may save significant income taxes by electing LIFO.

The spike in commodity prices is causing a ripple effect across the economy that is expected to trigger inflation in the prices of a broad range of products. Use of the last-in, first-out (LIFO) method of tax accounting for inventories is beneficial in an inflationary economy because it permits a taxpayer to compute a higher cost of goods sold deduction by using inflated current cost rather than a lower cost of goods sold deduction based on the lower historic cost. A higher cost of goods sold deduction produces lower margins, lower taxable income, and thus, a tax liability deferral and improved cash flow. If inflation continues for a number of years, the benefit of LIFO will increase each year as long as inventory quantities at year-end do not decline.

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