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LIFO stands for Last-In-First–Out, an accounting method that may provide substantial cash for your business. Over the last 25 years, we have provided LIFO accounting services, software and consulting to thousands of businesses and their CPAs and developed into the nation’s largest company specializing in LIFO accounting.
LIFO accounting allows you to benefit from inflation and high inventories. Inflation and increasing inventories normally eat into your profits by increasing your taxes. LIFO accounting, however, uses them to build a fund of cash that you can use as you wish. As long as your inventory remains inflationary and inventory levels do not significantly decrease, you will continue to add money to this fund. You usually pay back the fund only when the inventory becomes deflationary, inventory levels decrease too much, or when you sell your business.
Best of all, a LIFO election won't interfere with the ordinary course of business. LIFO is typically computed at year end and only impacts accounting records. Nothing changes but the way you report income.
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Reduce Taxable Income & Pay Less Tax:
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All businesses need more cash. Unfortunately, it's not easy to produce more working capital from a well-run business. However, by electing LIFO, you can reduce taxable income and pay less tax. The tax you save becomes cash in your pocket. With LIFO, you can benefit from inflation, high inventories and high tax rates.
LIFO subtracts inflation from inventory costs, which increases costs of goods sold and decrease taxable income. The LIFO benefit grows annually as inflation widens the gap between current year and past year inventory costs. This gap is the LIFO Reserve. The tax savings from the yearly deduction can be invested separately or re-invested in the business. Either way, the investment becomes a profit center.
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| Example |
Without LIFO |
With LIFO |
| Revenue |
$35,000,000 |
$35,000,000 |
| Cost of Sales |
$30,000,000 |
$30,000,000 |
| LIFO Adjustment |
$ - |
$ 600,000 |
| Gross Profit |
$ 5,000,000 |
$ 4,400,000 |
| Expenses |
$ 1,500,000 |
$ 1,500,000 |
| Other (Income) Expense, net |
$ - |
$ - |
| Operating Profit |
$ 3,500,000 |
$ 2,900,000 |
| Interest Expense, Net |
$ - |
$ - |
| Income before income taxes |
$ 3,500,000 |
$ 2,900,000 |
| Income Taxes |
$ 1,225,000 |
$ 1,015,000 |
| Extra Cash |
$ 0 |
$ 210,000 |
Because LIFO is a non-cash expense, the $210,000 reduction in income taxes is the only effect on your cash flow. Financial institutions and sophisticated investors understand how LIFO affects net income, so it usually does not cause any problems.
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SourceCorp: LIFO Accounting
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SourceCorp has specialized in LIFO accounting since 1983. We combine the research, technology and experience necessary to maximize the benefits of LIFO. Our team of LIFO accounting specialists stays abreast of all the latest LIFO regulations. Additionally, we are only a phone call away to address all of your LIFO needs. A full-time Account Manager is assigned to each client and CPA and available to promptly answer any question (technical or not). Our customer service team consistently receives exemplary scores on annual client and CPA satisfaction surveys.
Our clients and CPA partners feel secure knowing there are specialists standing behind their LIFO calculations. We will defend our methods and procedures, at no cost to the client, in the event of an IRS audit. With SourceCorp’s full-service approach, LIFO accounting has never been easier or safer. We can take care of everything from the initial election forms to the final calculations.
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Industries That Can Benefit
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• Fuels and related products
• Chemicals and allied products
• Rubber and plastic products
• Building materials
• Metal and metal products
• Transportation equipment
• Various miscellaneous products
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LIFO Accounting - Free Initial Analysis
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We make otherwise time-consuming, complicated and highly specialized tax benefit opportunities readily available to businesses and CPAs. Our sophisticated, yet automated processes ensure accurate, consistent, cost effective and timely results. Contact us today for your free initial analysis.
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