The last-in, first-out (LIFO) method allocates the most recent inventory costs to cost of sales. Assuming increasing inventory values, LIFO may reduce taxable income and, therefore, be preferred for tax purposes. But LIFO also poses financial reporting challenges. For example, you might not want to report lower earnings to stakeholders, measure changes in inventory costs, and incur taxes on “phantom income” from declining inventory or the “LIFO recapture amount” from an S corporation conversion. Contact us to discuss whether LIFO is right for your business.
