Lifo Inventory Accounting

By Neesa Peak

In the last ten years there have been a couple of discussions about repealing the allowance for companies to use the LIFO inventory accounting method. Proponents of the measure believe that it would increase tax revenue and balance out some of the games made by companies using the method during periods of inflation. Opponents argue that the measure would mostly impact industries with already low profit margins and that the overall effect of it will be to cause some significant dips in GDP.

LIFO is an acronym for a type of inventory accounting. It stands for last-in, first-out and is meant to approximate the cash/inventory flow for a company. Under LIFO, the most recently purchased inventory is assumed to be the inventory sold in any given sale. Along with its counter FIFO or first-in, first-out (and the weighted average method) it is used in industries where it is not possible or would be too resource costly to keep track of what specific units of inventory are sold at any given time. During periods of inflation, using LIFO means that a company will have the highest cost of goods sold (COGS) resulting in a lower overall income and so lower taxes.

Because LIFO, and FIFO, impacts taxes, companies are required to use it for both their yearly income generation calculations and their tax accounting. This is meant to ensure that they cannot report a lower level of income for taxes and so pay less on taxes while still reporting a high level of income to their shareholders. There are also limitations on how companies can switch between inventory accounting methods and how often they can do so.

The discussion around repealing LIFO focuses on the money saved by companies using it during periods of inflation, like now, creating an additional monetary reserve. Repealing LIFO would raise taxes on companies using this method, balancing out the gains from using the system. One of the main industries that uses this method is the fossil fuel industry, meaning that repealing LIFO would also help balance out some of the subsidies received by that industry. On the other hand, proponents of the idea argue that the measure would cost the GDP billions of dollars. They point out that LIFO is also used by grocery stores and other stores with low profit margins and high amounts of inventory; the measure would not apply to all industries equally.

Since this has come up more than once in the last several years, it’s important to know about it and the discussion around it. As it can affect GDP and tax revenue it is useful for us to know what it means and what the discussion around it is.

Sources:

Alex Muresianu, Alex Durante. “Understanding the Tax Treatment of Inventory: The Role of LIFO.” https://taxfoundation.org/research/all/federal/lifo-tax-treatment-inventory/ (October 12, 2022).

Thornton Matheson, Thomas Brosy. “Inflation and Oil Prices Spike Revive Case for LIFO Repeal.” https://taxpolicycenter.org/taxvox/inflation-and-oil-price-spikes-revive-case-lifo-repeal (May 12, 2022).

“Repealing LIFO Would Come with Devastating Costs.” https://www.msci.org/repealing-lifo-would-come-with-devastating-costs/ (May 16, 2025).

“Economic and Fiscal Analysis of the LIFO Method of Inventory Valuation.” https://static1.squarespace.com/static/66e48306b582b27bfaf3a893/t/67cf0ac12d3218083bcd8cb8/1741621954069/LIFO+Coalition+Final+Report+3.7.2025.pdf (March 2025).

“The U.S. Senate Bill Would End LIFO for Some Businesses.” https://www.msci.org/u-s-senate-bill-would-end-lifo-for-some-businesses/ (September 12, 2022).