Simplified LIFO can ease compliance, boost tax savings.

• Author: Goldberg, Michael J.
• Position: Last in first out inventory accounting method

By choosing the inventory method that best meets their circumstances, manufacturers and distributors can increase the potential to realize significant tax savings. FIFO- and LIFO-based methods are the two options companies can choose to calculate inventory. Simply speaking, FIFO matches older expenses against current revenues, while LIFO matches more recent expenses against that same revenue.

In general, LIFO is the right choice if the price of inventory is going up. Because many companies experience some degree of inflation in inventory costs, LIFO is a common choice, but has a downside. The compliance effort is complicated; the calculations can be complex and time-consuming.

Complicated compliance is not the only problem. Companies that do a good job of controlling their costs may find some of the benefit of LIFO disappearing. This benefit comes from offsetting current revenue with higher current costs, which reduces taxes. If a company is holding those costs down, taxes would trend up.

Simplified LIFO

Simplified LIFO relies on indices published by the U.S. Department of Labor Bureau of Labor Statistics. Instead of using complex calculations to generate an actual inventory inflation index, companies select published indices to establish the LIFO value of inventory. For companies holding down their inventory costs through favorable purchasing and labor costs, simplified LIFO may be especially beneficial.

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