Get Revenue Ruling 1996-22 - LIFO; Price Indexes; Department Stores.. The February 1996 Bureau Of Labor

Last-In, First-Out (LIFO) inventory deductions allow companies to deduct the cost of inventory at the price of the most recently acquired items and assumes that the last inventory purchased is the first to be sold. LIFO limits the impacts of volatile prices or inflation and lowers the tax cost of new inventory.

If the cost of your products increases over time, the LIFO method can help you save on taxes. This is because applying the most recent or higher inventory costs to the items you've sold will cause your profit margin to go down. The lower your profits, the less you'll owe in taxes.

Under the LIFO method, the goods most recently produced or acquired are deemed to be sold first. Thus, when costs are rising, LIFO generally results in higher cost of goods sold and lower taxable income.

This charge occurs when the cost of the most recently purchased inventory items exceeds the cost of the older inventory items. As a result, the LIFO charge reduces the company's reported profits and taxable income.

Industries That Use LIFO Automotive industries when needing to quickly ship. Petroleum-based production companies. Pharmaceutical industries with some products.

It offers tax benefits and improves your cash flow When using the LIFO valuation method during times of inflation, your current higher-cost purchases are matched against revenues to ensure profits are not overstated. This reduces income tax costs and as a result, improves your business cash flow.