What do you need to know about LIFO elections?

We have all been affected by the inflationary nature of the market during the last two years. We are surrounded by inflation in both our personal and professional life. Cost-saving opportunities are increasingly desired due to the unstable times we are currently living in and the predicted future instability. You might find a way to cut costs by using your inventory, which is a surprising place to look.

Most accountants are aware of the phrase “last-in, first-out” (LIFO), but it is unlikely that they immediately think of it as a way to save money on taxes. We’re here to outline some of the advantages that might apply to your company in 2021, 2022, and subsequent years.

The LIFO election may be possible for 2021 if you have not yet published 2021 financial statements and requested an extension for your 2021 tax return. But it’s never too early to begin making plans for later times. Get in touch with an Aventura accounting services expert if you’re interested in a LIFO election to find out whether there are any potential tax breaks for you.

How does LIFO work?

Any business that maintains inventory must perform inventory costing. Weighted average cost, particular identification, first-in, first-out (FIFO), and LIFO are just a few possibilities for inventory costing. However, LIFO is the most tax-efficient method and matches the most recent inventory costs, which has been useful recently.

Taxpaying companies can use LIFO, defined by IRC Section 472 as involved in the manufacturing or resale of goods. To determine the value of inventory sold, the LIFO method of the inventory accounting method values the most recently created items. In contrast to the tax due under the FIFO system, a business that chooses to cost inventory using the LIFO technique can leverage current or anticipated future costs of increased inventory to generate current tax savings. Similar to many other tax reduction strategies, LIFO’s tax savings for the current year are a deferral of taxes that will change depending on the future (for example, the LIFO reserve being eliminated in a deflationary time or the business ceasing to exist).

When ought I to think about LIFO?

The current economic climate, which is seeing the greatest inflation since the 1980s, is driven by a labor shortage or higher pricing. In 2022, the Fed has already increased interest rates, and further increases seem imminent. This wide range of variables suggests that inflation will continue for the foreseeable future.