Key insights
- Adopting the LIFO (last-in, first-out) accounting method can provide significant benefits to organizations with inventory.
- Inflation and tariff-related cost increases may amplify tax savings when LIFO is used.
- Timing matters due to book/tax conformity rules, making early evaluation important.
Help make a real difference for your bottom line.
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 of LIFO adoption, specify which inventory categories the election applies to, and 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 $2 million switching to the LIFO accounting method. Learn how.
Why timing matters when assessing LIFO
Inflation and tariff-driven cost increases may amplify tax savings when adopting LIFO.
Because of book/tax conformity rules, the decision to adopt LIFO must be made before filing tax returns and issuing financial statements. Since LIFO is applied prospectively, benefits from prior periods generally cannot be recaptured, making timing an important consideration.
Below is an illustration showing how elevated inflation can increase the potential benefits of adopting LIFO, using metal products as an example. The table compares adoption during a period of higher inflation with adoption under more typical historical conditions.
| Adopting LIFO during higher inflation | Adopting LIFO under typical conditions | |
|---|---|---|
| Inventory balance | $50 million | $50 million |
| PPI inflation rate for metal products | 10% | 4% |
| LIFO expense | $5 million | $2 million |
| Federal/state tax rate | 25% | 25% |
| Cash savings | $1.25 million | $500,000 |
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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