Key insights
- Adopting the LIFO (last-in, first-out) accounting method in 2025 can provide significant benefits to organizations with inventory.
- The impact of tariffs on external inflation rates has amplified tax savings from adopting LIFO.
- Delaying adoption could result in missed opportunities. Work with your tax advisor to learn how LIFO could benefit your organization.
Help make a real difference for your bottom line this year.
If rising costs have been eating into your margins, the LIFO (last-in, first-out) accounting method might be worth a closer look. It’s not just a technical choice — it can have a real impact on your tax bill, especially when prices keep climbing.
What is the LIFO accounting method?
LIFO allows companies to reduce taxable income by deducting higher recent inventory costs against current revenues — which is especially beneficial during periods of rising costs (inflation, tariffs, etc.).
How to adopt LIFO
Taxpayers need to file Form 970 (Application to Use the LIFO Inventory Method) with their tax return for the first year you adopt LIFO and specify which inventory categories the election applies to. They can then apply LIFO to all qualifying inventory.
Taxpayers electing LIFO for tax purposes must also use LIFO for financial reporting. This means that LIFO must also be reflected in a company’s financial statements prepared under GAAP prior to when reports are provided to any shareholder members, banks, beneficiaries, or other credit holders.
Note: The LIFO method may also impact bank covenants. Companies should discuss the change with their lenders when deciding.
Throughout the process, keep detailed records and maintain ongoing compliance with IRS regulations and financial accounting standards. Annual — and accurate— LIFO documentation and calculations are critical for maintaining eligibility. Manual work can introduce errors, using a software solution is practical way to avoid mistakes and keep your status intact.
A manufacturer saved $200,000 switching to the LIFO accounting method. Learn how.
Why you need to assess LIFO Now
The impact of tariffs on external inflations rates has amplified tax savings from adopting LIFO.
It’s necessary to make decisions and act before filing tax returns and issuing financial statements due to book/tax conformity rules. Adopting LIFO after 2025 may mean missing out on material benefits, as LIFO is applied prospectively and prior period benefits cannot be recaptured.
Below is an illustration of the amplified benefits of adopting LIFO this year — using metal products as an example. The table compares adoption in an average year (based on the last 20 years) and in 2025, using the Producer Price Index. The results are more than twice the average benefit:
| Adopting LIFO in 2025 | Adopting LIFO in an average year | |
|---|---|---|
| Inventory balance | $10,000,000 | $10,000,000 |
| PPI inflation rate for metal products | 8.9% | 3.8% |
| LIFO expense | $890,000 | $380,000 |
| Federal/state tax rate | 35% | 35% |
| Cash savings | $311,500 | $133,000 |
How CLA can help with the LIFO accounting method
CLA’s accounting methods team has established an efficient process to deliver LIFO services, including providing an initial assessment to confirm if adopting LIFO is right for you. We understand the complexities with LIFO and can help you determine which methods and sub-methods to enhance your adoption.
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