If you have questions or need
information, please contact us at
industrial@jacksonthornton.com.
 

Industrial

IMPROVE YOUR CASH FLOW WITH LIFO
If your businesses could use improved cash flow, ask yourself:

  1. Do you have inventory?
  2. If so, do you expect an increase in the purchase
    price of your products?
  3. Are you paying income taxes now, or expect to
    pay them in the future?

If you answered “yes” to these questions, LIFO inventory accounting may be the answer for you. 

WHAT IS LIFO ACCOUNTING?
LIFO – “last in-first out” – assumes the last items of inventory you buy or produce are the first ones you sell. Therefore, the cost of your inventory at the end of the year represents the cost of items first purchased or produced. Each year, you compute the amount of inflation in your inventory. That inflation is captured in an account called the LIFO Reserve. As long as inflation continues and inventory remains fairly steady or grows, your LIFO Reserve grows, too.

LIFO BENEFITS YOUR INVENTORY
By choosing LIFO, you can reduce current taxable income and pay less tax. The deferral of taxes increases the cash available to use in your business. In essence, you have an interest-free loan from the government! Over the last three years, LIFO enabled one client to defer roughly $160,000 in taxes. In this economy, an extra $160,000 of cash comes in handy.

KNOW WHEN TO USE LIFO
In inflationary times LIFO results in a decrease in net income – impacting those with loan covenants tied to net income. However, financial institutions will understand the impact on your financial statements and make allowances for the change to LIFO accounting. Also, know that the tax savings are a deferral of income: If you liquidate your entire inventory (by selling your business) you’ll have to report the income you previously deferred. As long as you keep operating your business, you’ll maintain the deferral.

FREE INITIAL ANALYSIS
Jackson Thornton Industrial will provide a free initial analysis, including the estimated tax deferral as well as the estimated cost for the actual, full analysis. It’s a simple, no-risk way to see the cost benefit of converting to LIFO for your business.