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LIFO Method: What is LIFO?

01/06/2016

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LIFO, which stands for "last-in, first-out," is an inventory valuation method used only by U.S. companies with IRS approval and is an established tax method that has been a part of the U.S. tax law for over 80 years. It is used by thousands of companies, including automotive dealerships for inventory management and tax planning purposes.

The LIFO Method

The LIFO method assumes that the last items placed into a company’s inventory are the first items sold. LIFO uses the most recent cost of vehicles manufactured to value the inventory at the end of an accounting period. LIFO calculations result in recording a LIFO reserve that will yield a lower value of ending inventory at the accounting date compared to the first-in, first-out (FIFO) method and would reduce taxable income by an amount equal to the change in the reserve account at the accounting date. Therefore, the LIFO method may be very advantageous to auto dealers.

The IRS summarizes the LIFO method as, “available to any automobile dealer engaged in the business of retail sales of new automobiles or new light-duty trucks for its LIFO inventories of new automobiles and new light-duty trucks. Light-duty trucks are trucks with a gross vehicle weight of 14,000 pounds or less, which are also referred to as class 1, 2, or 3 trucks.”*

LBMC LIFO Solutions, LLC, offers an affordable, easy-to-use LIFO calculation software for auto dealers and CPA firms with auto dealer clients. The software offers databases for those who inventory new and/or used vehicles utilizing Microsoft Excel® to report the results.

If you have questions about the LIFO method or our software, feel free to contact LBMC at 615-377-4600 to speak with a representative or use the contact form on this page.

Download Free Demo of LIFO Software LBMC LIFO Solutions, LLC, offers a FREE LIFO software demo that you can download here.

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We are here to answer any questions you may have about our software or provide you with an estimate.

* IRS: Alternative LIFO for Auto Dealers