LIFO & Taxation

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The acronym LIFO stands for "Last in, first out." Learn about LIFO and its relationship to taxation with help from a business consultant in this free video clip.

Part of the Video Series: Finance & Business Advice
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Video Transcript

Hi, my name is Alexis Guerreros. I'm a business consultant. Today, I'm going to talk to you about LIFO when it comes to taxation. Now, LIFO very simply means "Last In, First Out." And, that's a way that accountants or businesses use to discount or deduct the type of inventory they have. Now, say you own a business, and you've received 100 of whatever product that it is that you have. Over time, or throughout the year, you are able to sell 20 of those. So, now you have 80 left that's in your inventory at the end of the year. Now, you own that product, so you're going to end up paying taxes on it. Now, what used to happen was an accountant would tell you, "Well, the 20 that you sold, you should count as the last 20 that you received." So, that was the last that you received, because you actually have owned it for less. The other 80, you've owned it for a longer time, which means they depreciated in more value. So, in other words, the value of that product has gone down because you've been able to do nothing with it and over time, it's depreciated - the value's gone down. So, you're actually going to get a bigger deductible on your taxes. Well, a lot of rules have been changing over the last few years. They try to create less of a gap in that, what's considered maybe a loophole. So, LIFO as it stands may not be the most cost effective way for you to deduct or count your inventory. Make sure you either do a little bit research, or you speak to an accountant, to know that you're getting the most out of the inventory you have when it comes to taxes. Good luck with that business!

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