For any business with inventory, taking advantage of LIFO is simple, and a LIFO election doesn't interfere with the ordinary course of business. Nothing changes but the way income is reported and taxes are paid (or not paid!). Lipson's CPA firm, Miller, Wagner & Co., suggested he should seriously consider electing LIFO accounting. They put him in touch with SourceCorp Professional Services, Inc., a Fort Worth, Texas company, which specializes in LIFO accounting. All concerned agreed that a LIFO election could add substantially to the profitability of Popular Stores.

"I was skeptical at first, but the benefits have been greater than I imagined," said Lipson. "In only two years, LIFO accounting has deferred over $150,000 in taxes."

LIFO subtracts inflation from inventory costs, decreasing the business' taxable income. This tax deferral is kept in a LIFO Reserve account on the books. As inflation continues, the LIFO Reserve increases, providing a ready source of working capital.

By electing LIFO, companies like Popular Stores can actually benefit from inflation. LIFO uses inflation to build a fund of cash which can be used by the business as it pleases for as long as it wants. When the time comes to pay it back, no interest is due and the profit is left for the business owners. Of course, the profit in LIFO depends on what the company does with the fund before it is paid back to the government.

"If this fund is profitably invested, it will compound and grow and become a source of cash for many business purposes," says Stanton Williams, president of SourceCorp Professional Services. "Although it can be profitable over even a few years, a LIFO election should be viewed as a long term investment. Then, its true benefits will be realized."

For example, in 1996, Popular Stores elected LIFO and had a year-end inventory at actual cost of over $5.8 million. With less than three percent inflation, the company deferred nearly $170,000 in income. In a 34 percent tax bracket, that meant about $57,000 of taxes deferred. In 1997, they deferred an additional $96,900 in taxes. Projected over the next 20 years, Lipson could realize a profit of over $2.5 million!

SourceCorp Professional Services, Inc., the largest LIFO accounting firm in the nation, helps businesses of all sizes defer income tax and increase working capital with LIFO accounting. For nearly 20 years, SourceCorp Professional Services has made LIFO simple and cost effective for thousands of businesses across the nation. SourceCorp Professional Services offers LIFO accounting services, software and consulting.

 

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