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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