LIFO: back in style for US companies
By Jeffrey A. Ford, Grossman Yanak & Ford LLP
With the return of inflation at levels not seen for decades, the LIFO (last-in, first-out) method of inventory costing may be a valuable tax-saving opportunity. LIFO is not permitted by IFRS, but it is still acceptable in the US.
How and when it works
In situations with both rising costs and increasing inventory levels, LIFO results in the higher, more recent costs flowing through cost of sales with the lower, older costs in inventories. Its effects are muted or even reversed when inventory levels or costs decrease.
LIFO may be elected for all inventories or any component of inventories, such as raw materials, labour, outside processing or overheads. It may be elected for specific products or business lines. Of the many choices of methods available, the earliest acquisition method allows up to an additional year of inflationary effects to be captured in the calculations. LIFO calculations are typically done outside of a company’s ERP system, avoiding costly or confusing software changes.
The LIFO Conformity Rule requires that companies using LIFO for tax reporting must also use LIFO for financial reporting purposes.
LIFO is elected by way of a form filed with a company’s federal tax return. Thus, a company may evaluate the advantages of LIFO up to the filing date of the tax for the first year of using LIFO. The election is subject to IRS approval.
LIFO may also be revoked, also subject to IRS approval. When revoked, the LIFO reserve will be added to taxable income evenly over four years, beginning with the year of change. Further, LIFO may not be re-elected for at least five years.
Growing US companies with upward pressure on material, labour and overhead costs may benefit from electing LIFO. A LIFO election, however, is a significant decision and should be carefully evaluated. Equally important is the careful analysis of the many options within the LIFO election, which are not changeable once elected.
Jeffrey A. FordGGI member firm
Grossman Yanak & Ford LLP
Advisory, Auditing & Accounting, Tax
Pittsburgh (PA), USA
T: +1 412 338 93 02
Grossman Yanak & Ford LLP is a full-service CPA firm, headquartered in Pittsburgh, Pennsylvania. Their accounting and consulting service offerings include audit and assurance, tax advisory and compliance, business valuation and litigation support, business advisory/ management consulting, and ERP solutions.
Jeffrey A. Ford is a Founding Partner at Grossman Yanak & Ford LLP. He has over 30 years of experience, focused in audit and assurance, M&A transactions, and technology consulting. Jeff has served a variety of ownership groups including public and private companies, private equity groups and international investors. He currently serves on the AICPA Governing Council.
Published: Auditing, Reporting & Compliance Newsletter, No. 07, Spring 2022 l Photo: zephyr_p - stock.adobe.com