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1 Alex Muresianu & Alex Durante, Understanding the Tax Treatment of Inventory: The Role of LIFO 1 (2022)

handle is hein.taxfoundation/udritetx0001 and id is 1 raw text is: Understanding the Tax Treatment of Inventory: The Role of LIFO FISCAL Alex Muresianu Federal Policy Analyst FACT Alex Durante Federal Tax Economist No. 801 Oct. 2022 Key Findings • Last-in, First-out (LIFO) and First-in, First-out (FIFO) are two methods of inventory accounting used for both financial accounting and tax purposes. • Both LIFO and FIFO rely on the accounting principle of deducting costs from income when goods are sold. • This principle often comes into conflict with the economic principle of deducting costs when incurred, as inflation does not reduce the value of the deduction in real terms. • However, LIFO comes close to matching the economic ideal while still remaining true to the accounting principle. • Repealing LIFO would disincentivize inventory investment, hampering efforts to make U.S. supply chains more resilient. • Repealing LIFO would also reduce economic growth and penalize industries that typically keep more inventory on hand. The Tax Foundation is the nation's leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and global levels. We are a 501(c)(3) nonprofit organization. ©2022 Tax Foundation Distributed under Creative Commons CC-BY-NC 4.0 Editor, Rachel Shuster Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org