Amidst the convergence of monetary policy and disruptions in supply chains due to COVID-19, the pressing concern of shielding inventories, often the most valuable possession of clients, from the erosive impacts of inflation, has taken center stage for numerous tax advisors.

Whether catering to manufacturers, distributors, or retailers, the chance to counteract the adverse repercussions of escalating prices is open to clients. By embracing the Last-In-First-Out (LIFO) inventory approach, they can presently alleviate the pinch of price surges and annually conserve funds. Opting for LIFO nullifies the undesirable consequences of inflation, leading to reduced tax obligations and generating liquid assets for reinvestment. Businesses with an inventory exceeding $2 million, and grappling with inflation, qualify to opt for LIFO. The magnitude of potential cash savings is considerable, contingent upon the inflation pace and inventory scale.

Projections of Tax Benefits

Estimated Inflation 2.00% 5.00% 7.00% 10.00%
After-Tax Cash Savings (Assuming 35% Tax Rate)*
$2M P/Y inventory $14,000 $35,000 $49,000 $70,000
$5M P/Y inventory $35,000 $87,000 $122,500 $175,000
$10M P/Y inventory $70,000 $175,000 $245,000 $350,000
$20M inventory $140,000 $350,000 $490,000 $700,000

Seizing the Opportunity Amidst Inflation

As inflation continues to escalate, exploring LIFO accounting for clients becomes imperative. Regardless of whether a business is already on the LIFO method, considering the IPIC (Inventory Price Index Computation) method for 2021 could prove beneficial. The IPIC method employs Bureau of Labor Statistics indices to gauge inventory inflation. Given the current inflation trend, businesses of all sizes might realize substantial tax savings.

Real-world Illustrations

Examining LIFO's Impact through Case Studies

Case Study 1: An agricultural machinery retailer with $5 million in inventory opted for LIFO in 2019. Confronted with a 7% inflation rate year-to-date, this decision will result in an additional LIFO expense of $350,000 in 2021, augmenting their LIFO reserve to $500,000. Cumulatively, this strategic maneuver has translated to tax savings of $175,000, facilitating reinvestment in the business.

Case Study 2: In the domain of travel trailers and RVs, the prevailing inflation rate reaches 10%. Assuming this trend persists through the year's end, an RV dealership holding $8 million in the prior year's inventory, and electing LIFO in 2021, can anticipate a first-year LIFO reserve of up to $800,000, equating to tax savings of $280,000.

Exploring Industry Scenarios

With inflation exerting its influence across various sectors, it's pertinent to conduct a meticulous analysis of LIFO's advantages. This assessment seamlessly dovetails with business interests and is rendered at no expense to tax advisors and their clients. Merely submitting year-beginning and year-ending inventory files, along with unit costs, can elicit a complimentary estimate of potential benefits and a price quote for the project. Businesses of all stripes are capitalizing on LIFO, given its demonstrable capacity to navigate the challenges posed by inflation.

Industry Estimated 2021 Inflation Prior Year Inventory Value Estimated Year 1 LIFO Reserve After-tax Cash Savings
Furniture Retailer 10% $2,000,000 $200,000 $70,000
Non-current carrying wiring devices Manufacturer 38% $12,000,000 $4,560,000 $1,596,000
Boat Retailer 7% $17,000,000 $1,122,000 $392,700
Custom Metal Fabricator 50% $20,000,000 $10,000,000 $3,500,000
Retailer of Agricultural machinery and equipment 7% $12,000,000 $790,644 $276,725
Fertilizer Manufacturer 15% $6,000,000 $922,638 $322,923
(After-tax cash savings is measured using a 35% tax rate)
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Which Industries Qualify?

The R&D tax credit can be applied to a wide variety of industries, including (but not limited to):


Tool & Die

Metal Fabrication

Plastics & Injection Molding

Consumer Products


Architecture & Engineering

Food & Beverage

Financial Services

Mortgage & Banking

Software Development


Contract Manufacturing

Construction / MEP


Oil & Gas


Deb Roth
August 14, 2023

Maximizing Cash Flow Through Government Tax Opportunities

Amid the ongoing challenges posed by COVID-19, numerous small and midsize businesses are grappling with maintaining cash flow, operational capabilities, and their internal research and development initiatives. While the Coronavirus Aid, Relief, and Economic Security (CARES) Act did extend financial aid to these COVID-19-affected enterprises through emergency grants, retention tax credits, and forgivable loans, these solutions offer only temporary cash flow relief, falling short of providing lasting solutions.

Deb Roth
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Understanding the R&D Tax Credit Carryforward Period

The R&D Tax Credit Carryforward Period refers to the duration during which unused portions of research tax credits can be applied to offset future tax liabilities. This provision is often overlooked by many taxpayers who are eligible for R&D Tax Credits. In most cases, companies that have qualified research expenses but lack current income can carry forward these credits to offset taxes on forthcoming profits. The carryforward period allows credits to remain applicable for up to 20 years. Additionally, the option to carry back credits for the previous year is also available.

Deb Roth
August 14, 2023

Are R&D Tax Credits Convertible to Cash?

Navigating the world of R&D Tax Credits often prompts the question: Can these credits be converted into cash refunds? It's a query frequently posed by businesses seeking to maximize their returns on research and development investments. While R&D Tax Credits themselves aren't inherently refundable, they can still yield a financial windfall in the form of cash benefits.

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