| Organization: Manufacturer and distributor of electric parts for cars and trucks. | Need: Cost savings to counter increased inventory costs due to tariffs. | Outcome: $2 million in savings by switching to the LIFO accounting method. |
Understanding the situation
Profit margins were down significantly for a manufacturer and distributor of electric parts for the automotive industry due to tariffs raising inventory costs. The company has engaged CLA for many years for tax, audit, and consulting services and asked the firm if it had advice for combating increased inventory costs due to tariffs.
Learn how the LIFO accounting method could save you money.
Exploring the challenge
With the manufacturer’s hefty inventory count and costs, the CLA team thought the LIFO (last-in, first-out) accounting method could be a good cost-saving option. LIFO allows companies to reduce taxable income by deducting higher recent inventory costs against current revenues.
In times of rising costs, LIFO may often be a tax-favorable option, but due to its complexity and administrative burden, many companies with inventory shy away from it. However, given high tariffs and inventory costs, CLA ran a projected benefit model and the results were too favorable to ignore.
“We appreciate CLA bringing this rare opportunity to us and finding an option for significant savings without added administrative burden.” CFO, manufacturing company
Achieving results
CLA’s model showed the manufacturer could save six times the standard tax savings if it switched to LIFO in 2025. The new accounting method cut the company’s taxable income by about $6 million, producing $2 million in tax savings.
CLA will undertake the LIFO implementation and annual calculations, verifying favorable methods are applied according to the company’s facts and circumstances. The manufacturer won’t have to change any inventory accounting practices as the LIFO journal entries will be recorded as a top-level entry separate from its current inventory accounting.