How does LIFO work?
The last-in-first-out, or LIFO, method of inventory accounting removes inflation from inventory, reducing its value and lowering taxable income. The resulting increase in cash, referred to as a LIFO reserve, enables companies to invest in things like new equipment, research and development (R&D), process improvement, specialized staff, additional inventory, or even fund payroll.
While inflation is the biggest driver of the LIFO benefit, even in periods of low inflation, LIFO provides an annual benefit, creating a deduction each year. At its core, LIFO is an interest-free loan that helps stimulate business growth by providing much needed cash flow.
Multitudes of narrowly focused special interest deductions, most incorporated after 1986, are under review as Congress begins the arduous task of addressing tax reform. While LIFO is among those under consideration, its broad acceptance and adoption by thousands of U.S. companies for nearly 80 years – both large and small across numerous industries -- make it an unlikely candidate for significant reform.