Recent tariffs imposed by the Trump administration have reintroduced import taxes on a wide range of goods. While the goal is aimed at bolstering domestic manufacturing, the tariffs come with side effects that ripple through the economy, including increased prices that affect manufacturers, distributors, and retailers.
For businesses that rely on global supply chains, tariffs can lead to a spike in input costs. This environment makes it essential for companies to reevaluate their accounting strategies to manage financial exposure and mitigate the negative impacts of tariffs and inflation.
In times of rising prices, driven by inflation, tariffs, or both, the Last-In, First-Out (LIFO) inventory method offers a strategic tax advantage. LIFO assumes that the most recent (and typically more expensive) inventory is sold first. This results in a higher cost of goods sold (COGS) on paper, which in turn reduces taxable income.
By reporting higher costs, companies using LIFO pay less in income taxes during inflationary periods. This creates valuable cash flow, especially for inventory-heavy businesses like wholesalers, retailers, and manufacturers.
Key Takeaways for CPAs and Business Owners
For CPAs:
- Reassess clients’ inventory methods—LIFO may offer significant benefits in today’s inflationary, tariff-impacted environment.
- Ensure LIFO conformity requirements are met for financial and tax reporting.
- Consider LIFO’s long-term implications, such as potential distortions in financial statements or future tax liabilities, specifically large reductions in inventory or deflation.
For Business Owners and Taxpayers:
- Understand that rising import costs due to tariffs may offer a tax-saving opportunity through strategic accounting.
- Weigh the pros and cons of switching to LIFO, including short-term tax savings versus long-term impacts on earnings and financial presentation.
- Discuss with tax professionals whether your business qualifies for LIFO and how it could be implemented effectively.
What’s Next?
How inflation and tariffs play out for 2025 remains to be seen, but as the year progresses it’s important to keep an eye on the situation and be prepared with some tax-planning strategies.
Case Study: Manufacturing Company Under Tariff Pressure
Business: Mid-sized U.S. manufacturer of steel parts
Situation: Steel tariffs increase material costs by 25% year-over-year
With a LIFO Adoption:
- COGS increase by $1.2 million.
- Taxable income drops accordingly, saving over $250,000 in taxes in the first year.
Case Study: Retail Chain Facing Inflation on Imported Goods
Business: Regional consumer electronics retailer
Situation: Import tariffs and supply chain disruptions raised the cost of goods from Asia by 18%
With a LIFO Adoption:
- COGS increase by $800,000.
- Resulting tax savings totals around $168,000
Case Study: Auto Parts Distributor Reacting to Inflation
Business: Wholesale distributor of aftermarket car parts
Situation: Inflation and raw material shortages increase input costs by 20%
With a LIFO Adoption:
- Record a 15% increase in COGS, reducing reported income by $950,000.
- The result is a tax reduction of nearly $200,000.
Case Study: Consumer Goods Importer Navigating Tariff Impact
Business: Importer of home goods and kitchenware
Situation: Tariffs on Chinese goods raise input costs by 30% in one year
Tax Strategy Shift:
Adopt LIFO to immediately reflect rising landed costs.
- The increased COGS creates a $2 million decrease in taxable income.
- Effective tax savings: over $420,000.
The tax-savings from LIFO can help businesses that could otherwise see significant cash flow challenges that require them to divert capital away from critical investments like hiring, wages, and expansion.
