Optimize Inventory with LIFO Automation for Dealers & CPAs

Blog / Optimize Inventory with LIFO Automation for Dealers & CPAs

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.

Automation and LBMC Technology Compliance

LBMC Technology Solutions provides software that automates the used vehicle LIFO computation, therefore guaranteeing your dealership or dealership customer is fully compliant with the Used Vehicle Alternative Method (as stated in Rev-Proc 2001- 23). For dealerships and their customers, this automation streamlines the process and facilitates proper LIFO computation management.

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.

Frequently Asked Questions About LIFO

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.
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.
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.
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.
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.
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.
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.
Is the LIFO Inventory Valuation Method a Good Candidate for Your Dealership? Because of its several advantages, many American dealerships apply the LIFO (Last-In, First-Out) inventory value system. These include matching recent inventory costs with current income potential, postponing income tax obligations to lower risk of write-downs resulting from dropping inventory costs. The main reason LIFO is becoming more and more popular in the automobile sector is the always increasing vehicle prices. Using LIFO can help dealerships maximize income tax benefits, hence enhancing cash flows.

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.

Designed for car dealers and CPA firms with auto dealer customers, LBMC LIFO Solutions provides a reasonably priced, simple LIFO calculating tool. This program offers a consistent means of efficiently managing LIFO calculations. Start by phoning LBMC at 615-377-4600 and speaking with a representative or get a free LIFO software demo by visiting our website, www.lbmctech.com.

Understanding LIFO Reserve

Automation and LBMC Technology Compliance

Advantages of LIFO Accounting

Frequently Asked Questions About LIFO

IRS Compliance for Dealerships

Privacy settings

With the slider, you can enable or disable different types of cookies:

This website will:

This website won\'t: