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Frequently Asked Questions About LIFO for Auto Dealers

Why would a business choose LIFO accounting?

If your inventory costs are increasing, LIFO allows you to reduce income taxes and keep more cash in your business.

What types of businesses can benefit from LIFO accounting?

Any business with rising inventory costs. It does not matter how large or small the inventory items are.

Which types of businesses would not benefit from LIFO accounting?

Businesses with declining inventory costs should not use LIFO. In addition, businesses that do not pay taxes and do not expect to do so for the foreseeable future have no reason to elect LIFO.

How can I elect LIFO?

Simply attach a LIFO election form to the tax return for the year you want to elect LIFO and send a copy of it to Washington, D.C. It is automatically approved.

Why would I want to defer income? Or, If it's only a deferral, why elect LIFO?

Because LIFO generates cash, interest-free. Businesses find it more challenging today than ever to stay competitive. It is not often that an interest-free loan is made available.

To put it in another perspective, why do you contribute to an IRA, a 401K, or other retirement account? You do it even though you know you will pay taxes on the contributions and the earnings some day. The reason every business should consider LIFO accounting, is that, properly invested, deferred income taxes compound into hundreds of thousands and even millions of dollars.

I'm on LIFO and will probably have less inventory at the end of this year than I did at the end of last year. How will this affect my LIFO reserve?

Unless you have significantly decreased inventory, or inventory unit costs have declined during the year, your LIFO investment account should increase even when inventory levels drop.

Is it possible to "turn" inventory too often, or too infrequently, to make LIFO a worthwhile alternative?

NO! Inventory turns have absolutely nothing to do with LIFO benefits.

I'm already valuing my inventory at "Lower of Cost or Market". Why would I want to consider LIFO accounting?

Many people have not considered LIFO because they think they are getting all the benefit they can from write-downs. In fact, write-downs are not an effective tax planning tool because you must recapture the tax benefit as soon as the written-down inventory is sold. With a LIFO election, the benefit is not attached to any individual item, and the benefits can continue to increase every year. When you understand this concept, there is no real choice -- LIFO is far superior to write-downs.

How long do LIFO benefits last?

The LIFO election continues until the business' inventory is sold or until the business elects to discontinue LIFO.