Why Now May Be the Right Time to Transition to LIFO

If your business is navigating the intricacies of inventory management, the terms “FIFO” and “LIFO” likely ring a bell. The method you choose can hold significant influence over your business operations and tax obligations. Could your business benefit from a change to your inventory management strategy? Read our article below for a few factors to consider to see if now is the time to make a change.

What are “FIFO” and “LIFO”?

FIFO, or First-In First-Out, is a method used for calculating the cost of goods sold (COGS). The FIFO method is based on the assumption that the first inventory purchased is the first inventory sold. Then, when calculating the COGS, the prices paid for the oldest inventory purchases are used in the calculation.

LIFO, or Last-In First-Out, is a method used for calculating the cost of goods sold (COGS). The LIFO method is based on the assumption that the last inventory purchased is the first inventory sold. Then, when calculating the COGS, the prices paid for the most recent inventory purchases are used in the calculation.

Why Focus on LIFO Now?

Depending on the current economic environment, it could be beneficial to use the LIFO method in your accounting. Why? During times of high inflation when you are paying more for recently purchased goods than those during earlier periods, having a higher COGS can create opportunities for tax deferral. These tax deferral strategies have often been looked at as an interest free loan.

Should You Make a Change?

There are many factors that go into making an accounting method change, and the team at SDK is here to work with you to choose the right option for your business. Our group of professionals have helped clients make this change with great financial benefits and we are always here to discuss and find the right solutions. Call our team today at 612-332-5500 or email us at info@sdkcpa.com to schedule a time to review your current business needs.