Key Takeaways:
- The LIFO Reserve explains the variation between the LIFO value of inventory and the cost of inventory noted on the general ledger. Using LIFO since its implementation reveals the total value by which pre-tax income or taxable income of a corporation has been lowered.
- LBMC Technology Solutions provides software to automatically calculate used vehicles LIFO computation, therefore assuring compliance with the Used Vehicle Alternative Method. For dealerships and their customers, this automation streamlines the procedures.
- LIFO accounting helps companies with rising inventory costs, save income taxes and save more cash, therefore benefiting them and fitting for their situation. Businesses who pay taxes or those with diminishing inventory expenses, however, should not use it.
Understanding LIFO Reserve
Crucially important in LIFO accounting is the LIFO Reserve. It explains the variations between the LIFO value of inventory (LIFO Reserve = FIFO – LIFO) and the cost of inventory entered onto the general ledger. Since the approach was originally embraced, this reserve shows the total value by which LIFO has lowered the taxable income or financial reporting pre-tax income of a corporation. The LIFO reserve is another name for the general ledger contra asset account(s) used to document this variance.
How LBMC’s Software Supports LIFO Calculations
LBMC Technology Solutions provides LIFO calculation software for automotive dealerships and CPA firms serving dealer clients. The software helps teams prepare calculations and reports, while appropriate accounting methods and complete records remain essential.
LIFO calculations may be one part of your accounting team’s technology needs. If disconnected applications or repeated data entry also create extra work, read about integration and custom software development.
Advantages of LIFO Accounting
For companies with growing inventory expenses especially LIFO accounting is quite helpful. It lets these companies keep more cash and cut income taxes. It makes no difference the quantity of the inventory items or the rate of turnover of the goods. LIFO should not be used, though, by companies whose inventory costs are dropping. Businesses who do not pay taxes or do not anticipate doing so for the foreseeable future also have no need to elect LIFO.
Select LIFO must be included in major financial statements sent to creditors and owners if one wants it used for tax purposes. A corporation choosing to adopt LIFO for tax purposes must thus provide primary LIFO financial statements, which comprise annual financial statements and interim statements that can be aggregated to match a full year’s income. Provided it is indicated as a supplement to the main LIFO declarations, supplementary non-LIFO material may accompany the main LIFO statements. Attached to the tax return for the year LIFO is elected also includes a LIFO election form.
For a dealership-focused discussion of potential tax benefits and recordkeeping considerations, read Maximize Your Dealership’s Profits with LIFO.
Frequently Asked Questions About LIFO
1. Is it feasible to “turn” inventory either too frequently or too infrequently to make LIFO a desirable choice?
No, LIFO benefits have zero whatsoever bearing on inventory turns.
2. LIFO benefits last how long?
Either the company chooses to stop LIFO, has no ending inventory, or the LIFO benefit lasts until inventory costs drop below the levels when LIFO was implemented.
3. Why might a company decide on LIFO accounting?
LIFO lets you lower income taxes and maintain more cash in your company if your inventory expenses are rising.
4. Of which kinds of companies would LIFO accounting not help?
Companies whose inventory costs are dropping should avoid LIFO. Businesses which do not pay taxes or do not anticipate doing so for the foreseeable future also have no need to choose LIFO.
5. How can I choose LIFO?
For the year you wish to elect LIFO, simply affix a LIFO election form to your tax return and forward a copy to Washington, D.C. It is automatically authorized.
6. Why would I want to put off income?
Alternatively, if merely a deferral, why choose LIFO? LIFO creates cash, free of interest. An interest-free loan is rare in the competitive economic climate of today. Think about why you fund an IRA, a 401K, or other retirement account to help you put it in perspective. You do it even though you know eventually you will pay taxes on the earnings and contributions. Every company should give LIFO accounting some thought since, with appropriate investment, deferred income taxes can compound into large sums over time.
7. I’m on LIFO, hence at the end of this year I most likely will have less inventory than I did last year. How will my LIFO reserve be affected?
Your LIFO investment account should rise even if inventory levels drop unless you have drastically cut inventory or seen declining inventory unit costs during the year.
8. Is LIFO a good fit for my dealership?
Your dealership’s profitability, vehicle costs, inventory levels, and future plans all help determine whether LIFO is appropriate. Read more about why auto dealers choose the LIFO inventory valuation method and discuss your circumstances with your tax advisor.
IRS Compliance for Dealerships
For LIFO computation using the “Alternative Method,” the IRS offers thorough instructions. Dealerships following IRS rules and implementing this approach can be sure their estimates will resist IRS examination. A dealership must execute Form 970 to opt for LIFO in the first year and adjust for LIFO on the twelfth-month statement in order to follow IRS rules.
LIFO Calculation Software for Dealers and CPAs
LBMC LIFO Solutions offers calculation software for automotive dealerships and CPA firms with dealer clients. The software includes new and used vehicle databases and Microsoft Excel® reporting. Review the LIFO software features to see how the product could fit your calculation process.
Could LIFO software simplify your year-end calculations?
See how LBMC’s software could support your dealership or CPA firm. Download the free demo, or call 615-632-6856 to discuss your needs and request an estimate.
