Tax insight

LIFO method reduces income taxes related to higher tariffs

Insight
5 minute read
November 10, 2025

What happened?

Since April 2, the Trump administration has implemented a series of new tariffs. Although the precise tariff regime at any year-end is difficult to predict, tariff levels — and therefore inventory costs — could remain elevated for the foreseeable future. As tariffs increase inventory costs, cost of goods sold (COGS) under the last-in, first-out (LIFO) inventory method generally exceeds COGS under first-in, first-out (FIFO), which lowers taxable income.

Why is it important?

Periods of rising costs magnify the tax benefits of LIFO by accelerating the recovery of higher current costs and deferring income associated with lower historical costs, often creating an indefinite deferral so long as the taxpayer remains on LIFO and maintains or increases the quantity of its ending inventory. With tariff-driven inflation, taxpayers not using LIFO could miss an opportunity to obtain material tax savings. Taxpayers already using LIFO could further increase benefits by evaluating sub-method elections, such as inflation index methodologies and current-year cost determinations.

Actions to consider

Given the expectation of higher inventory costs due to tariffs, taxpayers not already using the LIFO method may want to consider adopting the LIFO method. For taxpayers already using the LIFO method, there may be opportunities to change various LIFO sub-methods to further reduce taxable income. However, a taxpayer not already using the LIFO method should consult an adviser regarding the restriction imposed by the LIFO conformity rule.