To determine the value of your business inventory at year-end, you can use either the first in, first out (FIFO) method or the last in, first out (LIFO) method. The method you choose will have a significant impact on your company’s taxable income.
FIFO assumes that the first goods acquired are the first ones you sell, while LIFO assumes that the last goods acquired were the first ones sold. Your company may be using the FIFO method if prices in your industry have been relatively stable or you’ve been showing a loss in the early years of operation.
Strategy: Switch to the LIFO method if the costs of goods are rising or you’ve had a high-income year. The change can result in a larger deduction for the cost of goods sold and a lower taxable income for your company.
Once you select an inventory method (FIFO or LIFO), you can’t change it without the IRS’ permission.
Note that new developments may affect the future use of LIFO. Stay tuned.