Inflation Can Create Tax Opportunities

America has not seen double digit inflation since 1980. While we are still far from double digits, the 7% inflation rate in 2021 was twice what it has been over the last 30 years. Economists don’t agree on whether this inflationary trend will continue into 2022 and beyond, but most feel that it will at least be higher than in recent history.

LIFO Inventory Valuation Method

LIFO, (Last In First Out) is a method of accounting used to value inventory. If a business uses LIFO, then it can deduct the cost of the most recently acquired inventory as part of Cost of Goods Sold when it sells an item of inventory. This allows the more expensive inventory to be expensed first. Normally, a business uses FIFO (First In First Out) or a weighted average method of valuing its inventory. In an inflationary period, these methods will result in a lower deduction as inventory is sold because the older, less costly inventory is expensed first.

Please watch this video by Susan Roberts and Adam Mleziva, as they discuss electing LIFO, the mechanics of making the election, and when a business may be a good candidate for the change.