With a potential recession on the horizon, we know you want resources to help your business master the moment. We've put together our Agility & Excellence Resource Center to bring you strategies and solutions with a finger on the pulse of what's ahead.
Maneuvering through the current economic landscape is like a game of chess, with businesses strategizing their every move. In these uncertain times, cash flow is more critical than ever. The cost of borrowing is higher with interest rates up, and if your business qualifies for the Employee Retention Tax Credit (ERTC), tax liability awaits.
However, there is a way to make your next move count. If you received the ERTC for the years 2020 and 2021 and your business qualifies for the last in, first out (LIFO) method of accounting, you have a rare opportunity for significant tax deferral. Using this method, you can keep more of your ERTC refund, preserving more cash in the bank. And just like capturing the opponent’s king — it’s all about timing.
What Is LIFO?
When it comes to inventory valuation, LIFO is a tactic that can help businesses with tax savings during times of record-high inflation. By recording the newest products as the first items sold, companies can report lower net income and book values, resulting in lower taxation. In addition, the tax benefits of LIFO improve with higher inflation and when inventory remains steady or increases.
While car dealerships are a common example of an industry that uses LIFO, any industry struggling with rising inventory costs can benefit from the accounting method. Many CFOs may not realize their organization is a great fit. Take a major retailer, for instance. With inflation affecting almost every product they stock, this type of company would have much to gain from using LIFO. By using this method, they can better reflect their current income and lower their taxes.
When ERTC & LIFO Meet
In the wake of the COVID-19 pandemic, businesses nationwide struggled to stay afloat. Introduced as part of the CARES Act in March 2020, the ERTC emerged as a beacon of hope. By creating large taxable refunds for business owners in 2020 and 2021, the ERTC has provided much-needed financial relief to many companies impacted by COVID mandates. For some businesses, the refunds have reached the seven-figure mark, which also translates into a significant tax liability.
If you can elect LIFO in the same year you have to remit cash for the ERTC, you may significantly reduce the amount of cash flow required to fund your tax obligation. By doing so, you'll be able to keep more of the cash you received from the ERTC – it's the best of both worlds.
Companies that are currently using LIFO and companies new to LIFO can take advantage of the layered effect of this method. For those already using LIFO, a tax professional can help you reassess the method you're using and consider making a switch to a different method that may have a better impact based on current inflation rates.
If it is your first time using LIFO, you can maximize your ERTC benefits even more. That's because in the first year of using LIFO businesses can catch up on years of not adjusting for inflation, resulting in a significant one-time catch-up on inflation. This can lead to a much bigger LIFO deduction in the first year than in subsequent years.
For companies that qualify for the ERTC, the LIFO accounting method can be a winning solution. With interest rates on the rise and businesses scrambling to preserve cash flow, LIFO can help your company keep much of the money received from the ERTC. In today's economic environment, where borrowing is expensive and liquidity is key, LIFO can be a game-changer for businesses looking to navigate these turbulent times. So, now is an ideal time to consider if LIFO is an appropriate inventory method for your business.
Navigating the intricacies of the ERTC and LIFO can be a daunting task for any CFO, and defensibility is crucial. That's why it's vital to seek out the help of professional tax accountants who have the experience and expertise to guide you through the process.
Contact us today to maximize your tax savings.
Copyright © 2023, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.
CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).