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Year-end ’08 tax strategy: Switch your inventory method

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in Small Business Tax

In a sign of the times, your business may want to switch its method of accounting to reflect current economic conditions.

Basic premise: To determine the inventory value at year-end, a company generally will use either the “first in, first out” (FIFO) method or the “last in, first out” (LIFO) method. The FIFO method assumes that the first goods acquired are the first ones sold. In contrast, under LIFO the last goods acquired are treated as the first ones sold.

Strategy: Consider changing to LIFO for 2008. This method is particularly beneficial if prices have escalated in your industry.

Because you’re basing costs of goods sold on a higher price to your business with LIFO, it will lower your taxable income. This can help take the sting out of a down year.

Note that once you choose either the LIFO or FIFO inventory method, you can’t change to another method without obtaining the IRS’ permission.

Tip: Make sure this is the right move for your company. Consult with your tax pro before requesting a switch.

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