Sara Richardson | Source Advisors
With inflation on the rise, now is the time to look at Last-In-First-Out (LIFO) accounting if you have inventories of building supplies, lumber or hardware. Whether you are already on LIFO or not, analyzing the IPIC LIFO method for 2022 could be a great opportunity. IPIC LIFO uses indexes published by the Bureau of Labor Statics to measure inflation on your inventory. In 2022 these indexes show inflation is on the rise, which means businesses of all sizes could experience considerable tax savings using LIFO.
Whether you are a manufacturer, distributor, or retailer, you have the opportunity to mitigate the negative impact of price increases and annually save money by using the LIFO inventory method. Adopting LIFO removes the phantom profits caused by inflation, lowering your tax liability and creating cash for reinvestment in your business. Any business with over $2M in inventory that is experiencing inflation is a qualified candidate for electing LIFO. Depending on the inflation rate and the inventory level, the cash savings can be quite substantial.
| TAX BENEFIT PROJECTIONS | |||||
|---|---|---|---|---|---|
| Estimated Inflation | 2.00% | 5.00% | 7.00% | 10.00% | 15.00% |
| Estimated After-Tax Cash Savings* | |||||
| $2M inventory | $14,000 | $35,000 | $49,000 | $70,000 | $105,000 |
| $5M inventory | $35,000 | $87,500 | $122,500 | $175,000 | $262,500 |
| $10M inventory | $70,000 | $175,000 | $245,000 | $350,000 | $525,000 |
| $20M inventory | $140,000 | $350,000 | $490,000 | $700,000 | $1050,000 |
*Estimated After-Tax Cash Savings assumes a total Tax Rate of 35%. Estimated Inventory level is as of year beginning.
Case Studies
- A lumber wholesaler with about $50m in inventory elected LIFO in 2017 while there was inflation of over 25% . After experiencing some deflation in 2018, inflation was back for them in 2019 and 2020. The business now has a LIFO reserve of almost $25m; that represents a cumulative $8.7m in tax savings they’ve been able to reinvest in their business. Year- to-date inflation continues to grow for their inventory so that savings may increase even more in 2022.
- Inflation for lumber and hardware stores is currently ranging from 15%-20%. Assuming this holds out until year end, a lumber and hardware retailer with $8m in prior year inventory that elects LIFO in 2022 can expect a first year LIFO reserve of over $1,200,000, translating to more than $420,000 in tax savings.
- An analysis of LIFO benefits is seamless and is provided at no cost to you. Just send a copy of the year beginning and year ending inventory files, including unit costs, and we’ll provide a free estimate of benefit and a price quote for the project.
| Industry | Estimated 2021 Inflation |
Prior Year Inventory Value |
Estimated Year 1 LIFO Reserve |
After-tax Cash Savings* |
| Furniture Retailer | 10% | $2,000,000 | $200,000 | $70,000 |
| Non-current carrying wiring devices Manufacturer | 38% | $12,000,000 | $4,560,000 | $1,596,000 |
| Boat Retailer | 7% | $17,000,000 | $1,122,000 | $392,700 |
| Custom Metal Fabricator | 50% | $20,000,000 | $10,000,000 | $3,500,000 |
| Retailer of Agricultural machinery and equipment | 7% | $12,000,000 | $790,644 | $276,725 |
| Fertilizer Manufacturer | 15% | $6,000,000 | $922,638 | $322,923 |
*Estimated After-Tax Cash Savings assumes a total Tax Rate of 35%. Estimated Inventory level is as of year beginning.
