§472 Last-in, First-out Inventories

Summary

A business can use the last-in, first-out (LIFO) way to count its inventory if it files an application when and how the tax official requires and follows any rules the tax official sets so income is shown clearly. Under LIFO, items left at year end are treated first as those from the opening inventory (in the order they were bought) to the extent they remain, then as items bought during the year. Inventory is valued at cost. When LIFO is used for the first time, the opening inventory is treated as if acquired all at once and its cost is figured by the average-cost method. To start LIFO, the business must show that, for that first year, it used only the same counting steps above when making reports to shareholders, partners, beneficiaries, or for credit purposes. The opening-inventory change caused by switching to LIFO must be spread evenly over the first 3 taxable years that LIFO is used. Once a business uses LIFO, it must keep using it in later years unless the tax official allows a change or finds the business used a different procedure in reports to shareholders or for credit and requires a change. The tax official may allow use of published government price indexes for pricing inventory. Companies in the same financially related group are treated as one taxpayer for the rules above; that group means an affiliated group like in section 1504 but with “50 percent” instead of “80 percent,” or any set of companies that consolidate or combine financial statements.