LIFO for Manufacturers
Manufacturers across all industries have the ability to remove the negative effect of inflation on their inventory costs by using the LIFO inventory method. Whether you are machining parts or assembling durable goods, your business can benefit from this near permanent income deferral, creating cash to reinvest in your strategic initiatives. Businesses with as little as $1M in inventory that are realizing increased raw materials costs are prime candidates for this valuable tax strategy.
A manufacturer of heavy equipment was experiencing inflation and decided to look into LIFO. The process of deciding to elect LIFO was simple for this taxpayer. The controller provided year beginning and year ending detailed inventory files to Source Advisors and our team analyzed the options for LIFO to maximize their tax benefits. After reviewing the manufacturer’s internal inflation and comparing it with the published price indexes of the IPIC method, we determined that the IPIC method gave them a much better cash savings for the first year.
The taxpayer elected IPIC method LIFO for 2019, taking advantage of the 6.5% inflation and giving them a first year LIFO reserve of $2.8M – translating to almost a million dollars in after-tax cash savings to them in the implementation year.
A similar company on LIFO for many years has taken advantage of inflation and their LIFO reserve has grown to over $35M, with tax savings of millions of dollars.
All types of manufacturers can take advantage of LIFO.