As the specter of inflation looms large in 2022, businesses dealing with inventories of building supplies, lumber, or hardware should seriously consider exploring the Last-In-First-Out (LIFO) accounting method. Whether already using LIFO or not, there's an excellent chance to capitalize on the IPIC LIFO method for this year, presenting a potential windfall for businesses. The IPIC LIFO approach relies on inflation measurements provided by the Bureau of Labor Statistics, and the current climate indicates inflation is on the rise, which can translate to substantial tax savings through LIFO.

Be it a manufacturer, distributor, or retailer, any business with an inventory value over $2 million and facing inflationary pressures stand to benefit significantly from adopting the LIFO inventory method. By employing LIFO, businesses can offset the adverse effects of rising prices and realize annual cost savings that can be reinvested to bolster the company's growth. The adoption of LIFO eliminates the phenomenon of phantom profits brought about by inflation, leading to a reduction in overall tax liability. Consequently, the potential cash savings can be quite remarkable, depending on the inflation rate and inventory level.

Tax Benefit Projections:

Here are the estimated after-tax cash savings for various inventory levels and different inflation rates (assuming a total tax rate of 35%):

Estimated Inflation 2.00% 5.00% 7.00% 10.00% 15.00%
$2M inventory $14,000 $35,000 $49,000 $70,000 $105,000
$5M inventory $35,000 $87,500 $122,500 $175,000 $262,500
$10M inventory $70,000 $175,000 $245,000 $350,000 $525,000
$20M inventory $140,000 $350,000 $490,000 $700,000 $1,050,000

Case Studies:

Several businesses have successfully benefited from employing the LIFO method:

A lumber wholesaler with around $50 million in inventory adopted LIFO in 2017 during a period of over 25% inflation. Despite experiencing some deflation in 2018, inflation returned in 2019 and 2020. The business now boasts a LIFO reserve of almost $25 million, which represents a cumulative $8.7 million in tax savings, funds that have been reinvested in the business. As inflation continues in 2022, these savings could increase even further.

Lumber and hardware stores are currently facing inflation ranging from 15% to 20%. Assuming this trend persists until year-end, a lumber and hardware retailer with $8 million in the prior year's inventory could expect a first-year LIFO reserve of over $1.2 million, translating to more than $420,000 in tax savings.

Discovering the Benefits:

Analyzing the advantages of LIFO is seamless and comes at no cost. By providing the year-beginning and year-ending inventory files, including unit costs, businesses can receive a complimentary estimate of the benefits and a price quote for the LIFO project.

Industry-Wide Impact:

The potential after-tax cash savings for different industries, based on their inflation rates and inventory values, are as follows:

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
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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):

Aerospace

Tool & Die

Metal Fabrication

Plastics & Injection Molding

Consumer Products

Manufacturing

Architecture & Engineering

Food & Beverage

Financial Services

Mortgage & Banking

Software Development

Chemical

Contract Manufacturing

Construction / MEP

Pharma

Oil & Gas

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