Jamie Pentagulio


Imagine a company with $5 million of inventory that’s taking proposals from several CPA firms to properly manage it. The company is not on LIFO, their current CPA firm never performed a benefit analysis or even offered the idea of LIFO to them and the only thing the client’s CFO recalls about LIFO is from his college accounting course. Many of the CPA firm proposals that the company received offered great opportunities and an enhanced level of service that at least met, if not exceeded, their expectations. But one CPA firm’s proposal had something that set itself apart from all the others. That something was LIFO and the tax benefits it offers. It provided a significant taxable income reduction for the upcoming year end, but it also offered something that none of the other tax minimization opportunities did: the prospect of this benefit growing in perpetuity. This idea would improve the company’s cash flow & allow for the ability to reinvest more than they had before. The company was also very impressed with the 20-year pro forma LIFO calculation showing that their industry had a consistent inflation track record. There was not another tax deferral opportunity that came even close to comparing to the benefit that LIFO would provide. Best of all, the CPA firm had a partnership with a 3rd party service provider that they could completely outsource their LIFO calculation to at a cost that was a fraction of the benefits. It only made sense to go with the CPA firm that provided them with such an idea.


What set the CPA firm who offered the opportunity apart from the rest whom did not? They had reached out to LIFO-PRO after getting the opportunity to make a proposal to the company. They simply provided us the company’s name, URL & estimated inventory balances for the past two years. Two days later, LIFO-PRO delivered this CPA firm a complimentary LIFO Election Benefit Analysis Report showing how the company would have reduced their taxable income by $3 million if they would have elected LIFO 20 years ago. It also estimated that the company could reduce their taxable income by an estimated $250K for their upcoming year end. It also provided a list of historical inflation rates for the company’s most predominant inventories. Best of all, the report provided a great overview of LIFO to help educate both the firm & their soon to be client about how it all worked. Both the CPA firm & the company were happy because LIFO-PRO provided this analysis for free, and they also gave them a way to enjoy the benefits while avoiding the time & hassle of making the calculation.


Every CPA & their firm wants to be the one who landed the new client in the above story. How many times have you or your firm possibly missed out on new business because another firm had a great idea (like LIFO) that your firm failed to offer? We have seen the above scenario occur dozens and dozens of times. It may be easy to avoid even mentioning LIFO to prospective clients because of the same reasons that everyone else uses. The client’s accounting staffs don’t have the expertise to make their own LIFO calculation, nor does the CPA firm for that matter. LIFO is complicated and can be a time-consuming bother. Why go out of your way to make accounting for inventories more difficult? Common misconceptions such as LIFO probably going away sooner or later, LIFO potentially putting some debt covenants in jeopardy and that shareholders don’t like the reduced net income that shows on their financial statements are simply fallacies. We’ve heard countless other excuses, but that’s all that they really are. They are common reasons why many companies that would benefit from using LIFO have elected not to. They are also the reasons why some CPA firms have convinced themselves that they won’t work with LIFO, let alone suggest the idea of using it to current or prospected clients.


For most us though, we learned at some point from an Accounting or Economics professor that there’s no such thing as a free lunch, meaning we understand that most opportunities come along with opportunity cost. What everyone should agree with is the fact that the opportunities providing the best benefits and least amount of costs should be considered.


The good news is there’s an easy way to offer to come out on the winning side of the story described above (without having to be a LIFO expert)! LIFO-PRO is led by the country’s leading LIFO expert who started our firm based on his experience of dealing with LIFO as an auditor at Touche Ross. What he became convinced of was: 1) LIFO errors can easily occur when done manually 2) Based on all of his clients LIFO calculations he reviewed, it was apparent that it was a matter of when & not if that a calculation error will occur 3) LIFO is highly underutilized due to the calculation complexities 4) A software solution would greatly improve the ability to accurately & easily make LIFO calculations


Our founder’s prior dealings with LIFO along with the knowledge gained from his Master’s Degree in Mathematics allowed him to have the ah ha moment that led to the LIFO-PRO software coming to reality. It is currently the only commercially available canned LIFO software. The Wal-Marts, Rite Aids & Kroger’s of the worlds jumped on board right away in the 90’s, but what our founder didn’t realize at that time is that a big part of our company’s growth would be from CPA firm partnerships & delivering a complete set of LIFO solutions to them on their client’s behalf. What makes us such an attractive partner to CPA firms & their clients is this:

  • Offerings:
    1. Software: minimize the time spent on LIFO, simplify your procedures & offer user-friendly, understandable reports
    2. Turnkey Outsourcing solutions: we handle 100% of the LIFO calculation work & deliver a complete set of reports as an end product
  • Complimentary services:
    1. For clients & prospects that aren’t on LIFO but possibly benefit from electing: We offer the highest quality analysis using our proprietary methods, resources & software. The end product is a LIFO Election Benefit Analysis Report
    2. For clients & prospects that are on LIFO: we offer complimentary assessments. The end product is a Best LIFO Practices Methods Review


But why partner with a firm like LIFO-PRO when your firm could offer all that your client really needs? The same reason why LIFO-PRO outsourced our website redesign to a website design company. It’s also the same reason why people get their oil changed at Jiffy Lube as opposed to doing it themselves. For our firm, my time is much more valuable spent on business development & many other things not related to web design. Furthermore, both LIFO-PRO & our website visitors are far better off with a site created by a company specializing in web design. For many people, Jiffy Lube could probably do 5 oil changes in the time that it would take many of us to complete one. Being able to obtain exceptional service quality at a cost that comes at a fraction of the value of the time saved is what leads many to turn to a specialized service provider. We have no doubt that many firms can do LIFO for their clients, but how valuable is the product you’re providing your client if there’s a much higher quality one that could be provided to them in a fraction amount of the time that your firm would spend to get complete the work? If you’re a believer in the benefits that LIFO provides, wouldn’t you also want to be absolutely certain that the calculation is done right & that the client has no LIFO audit exposure risk?


We see many firms objecting to the idea of outsourcing their clients LIFO calculations to us because:


  • If it’s a client who’s already on LIFO & the CPA firm does the calculation, they’d no longer be getting paid to do so
  • If it’s a client who’s already on LIFO & the company does the calculation, paying a 3rd party to do so leaves less money for the CPA firm to charge for reviewing their LIFO calculation or providing value-added tax services related to the LIFO calculation
  • If it’s a client who’s not on LIFO but will be, the CPA firm will not be fairly compensated to review or provide value-added services relating to the LIFO calculation


We understand that LIFO is a time investment for all CPA firms, and there has to be some way of being fairly compensated by their clients, even if they don’t manage the calculation. For firms whom have clients using LIFO, the ones providing review or audit services will spend more time on a client using LIFO compared to one that is not. The same could be said of a firm handling the tax work for a company on vs. not on LIFO. Our answer to this conundrum is simple. That’s why LIFO-PRO offers wholesale & retail model for CPA firms as well as volume discounts. LIFO-PRO invoices the CPA firm for their client’s LIFO calculation at a cost that is lower than what we would charge a company if we were working directly through them. The reason why this is that CPA firms needs to be compensated for the value-added services their client receives related to the LIFO calculation that LIFO-PRO would have to provide if they were working directly with us. This way, firms can deliver LIFO services to their clients while being properly compensated for doing so.


Although we’re aware that some CPAs are perfectly capable of handling LIFO, we’re also aware of the exponential gains made by firms that we partner with as a result of being able to outsource 100% of their client’s LIFO needs to us. In fact, the CPA firms that outsource their client’s LIFO calculations to us have more time to spend on business development, landing new clients & offering services that they’re likely much more proficient in than LIFO. It’s clear to us that these firms also offer LIFO to more of their clients than CPA firms who handle their client’s LIFO calculations in house. For some CPA firms, working with us is the only way their client can be provided LIFO solutions.


Many CPAs can help their clients make LIFO calculations until a complicated situation arises. Such examples include:

  1. Recreate LIFO layer history: It is not that uncommon for a company to have an inadequate LIFO layer history schedule. Examples include values in the schedule that are not internally consistent with other values or there are math errors. An adequate LIFO layer history schedule is required to meet the IRS adequate books and records standard. At least a couple of times a year, we need to recreate a LIFO layer history schedule that does currently does not support the per tax return LIFO reserve by making working backwards from the per return LIFO reserve and FIFO value to recreate layers for all years since the LIFO election to tie to actual tax return values.
  2. Repoolings (regroupings): Purchase or sale transactions and reorganizations or method changes often require combinations or splits of LIFO layer history schedules. The IRS provides no guidance about the steps required to do this but this is important in order to preserve LIFO deferral. LIFO repooling work is a challenge for someone with little or no experience doing this but we do this work on a weekly basis, so we are able to do repooling work accurately in a short amount of time.
  3. Retrospective GAAP analysis: LIFO method changes may require retrospective accounting entries and disclosure for LIFO method changes. This analysis need not entail a major project if people involved in a method change have experience in this area. The use of our LIFO-PRO software along with many years of experience enables us to make accurate pro forma prior year LIFO estimates required (both IPIC and internal index methods) without creating a large project to do this. We perform this type of analysis several times a year.
  4. Double-extension method rescues: The use of the double-extension method not only requires substantially more work than the link-chain method and produces more volatile LIFO inflation than using the link-chain method but it also does not accurately measure annual inflation. Any company using the double-extension method should make it a priority to change to the link-chain LIFO method. We believe that the double-extension method will eventually not be allowed by the IRS and for GAAP but until this happens, making this method change is not simple. We have helped over 50 different companies using the double-extension method and the majority of these companies made the change to the link-chain method using our experience with dealing with both the tax and GAAP method change rules.
  5. Internal index methods assistance: We have helped numerous companies with their internal index calculations. Errors using this method are numerous and we have the experience necessary to deal with this type of problem. In 2019, we created a new LIFO-PRO software feature that automates internal index calculations. This feature includes the dealing with the different ways in which missing item cost values are handled and identification of inflation outliers (greater LIFO inflation and inflation than a certain threshold).
  6. IPIC errors: The error rate for making using spreadsheet assisted manual calculation is very high. The most common IPIC method errors include using improper PPI codes, improper 10% method math (double counting of BLS weights is a very common error) and the use of the wrong month and wrong final v. preliminary indexes designation. The use of our LIFO-PRO software greatly these types of errors.
  7. Change to the IPIC LIFO method: This is the most desirable LIFO method for most companies. We have helped hundreds of companies make this change.
  8. Fast LIFO election analysis: We perform this work for dozens of CPA firms at no cost to their clients. Because we have done this work for hundreds of companies and because the use of our LIFO-PRO software, we can make accurate pro forma prior year calculations to determine what LIFO inflation has been for a company’s current inventory mix without making a big project of this. We also make this analysis for companies already using LIFO that are considering a change to the LIFO method. We perform this type of analysis on a weekly basis.
  9. Assignment of PPI codes to inventory items: Many of our clients perform this work in-house but a substantial number of our clients outsource this work to us. Our substantial experience doing this work along with our knowledge of BLS item definitions allows us to complete this work in less time and with greater accuracy. Built into our LIFO-PRO software is a feature that automates the replacement of discontinued PPI codes (this occurs 3 times during the year) can save a substantial amount of time
  10. Our use of LIFO-PRO software: We and our clients are the only parties that have access to this technology that provides for accurate LIFO calculations spending far less time than if manual spreadsheet calculations are made.
  11. Rx/PPI database: We created and maintain a database of all drugs used with the assignment of the proper PPI to all these items. This is a very valuable resource for our drug retailer (drug stores and supermarkets), wholesaler or manufacturing clients. This database and our software to make matches to client pharmacy item list saves a very substantial amount of time of making assignment of PPI code to drug items.
  12. Flexibility of offerings: We offer CPA firms and their clients a little or a lot of help with their LIFO needs.

Even if the CPA has LIFO experience, they may be unable perform the LIFO calculation work if they are providing assurance services.


Let us help you land on the winning side of the above story. Schedule a call or offerings demo, you can reach us at 402-330-8573, by email at lifopro@lifopro.com or by simply clicking here.