Bob Richardson

LIFO-PRO releases this list of the top 50 LIFO candidates annually in October following the Bureau of Labor Statistics (BLS) releasing September Producer Price Indexes (PPI). This allows for the best LIFO candidates to be identified in advance keeping in mind that considering a LIFO election typically requires prior planning and buy in from the company considering an election and/or their CPA firm. This also provides for the ability to get a fairly accurate idea of the potential tax benefits of LIFO prior to year end. External index inflation data is used because 1) it allows for the most comprehensive industry coverage while providing accurate & standardized price representations 2) Many companies use PPI to measure inflation for purposes of LIFO calculations.

The criteria for being included in the list as great candidates for LIFO election below is as follows:

  • Must be a current Bureau of Labor Statistics Table 9 Producer Price Index category
  • Three of the four historical annual inflation rate averages must be greater than or equal to 1% (3, 5, 10 & 20 year averages)
  • Inflation frequency rate of greater than 50% (11 or more of 20 periods from 2000 – 2019)
  • 9 months ended September 2019 inflation rate of greater than 1% (September 2019 ÷ December 2018)

LIFO-PRO’s Top 50 LIFO Candidates of 2019: Using Bureau of Labor Statistics (BLS) Producer Price Index (PPI) Table 9 Inflation Data

PPI CodePPI Category DescriptionYTD '191Y '181Y '171Y '161Y '153Y Avg.5Y Avg.10Y Avg.20Y Avg.Inf. Freq. Rate*
0223Unprocessed and prepared seafood6%1%-3%20%-9%5%2%3%3%75%
0264Other beverage materials3%3%1%2%1%2%1%2%2%90%
0347Screen printed textile materials, embroideries, and lace goods3%2%1%1%0%1%1%1%1%80%
043Footwear3%0%2%0%3%1%2%2%2%95%
0622Paint materials4%3%4%3%-12%3%-1%1%3%75%
0637Biological products, including diagnostics3%2%-1%3%2%1%1%2%2%85%
0811Softwood lumber3%-9%14%9%-6%4%1%4%1%60%
0841Wood pallets and pallet containers, wood and metal combination4%9%4%0%-1%4%4%3%2%75%
087Treated wood and contract wood preserving3%1%2%-1%-2%1%1%2%1%65%
0948Blankbooks, binders, and bookbinding work4%3%5%1%1%3%3%3%0%90%
1021Nonferrous metal ores13%-1%18%16%-19%11%2%6%9%70%
1024Secondary nonferrous metals3%-1%9%8%-14%5%1%3%4%65%
1031Metal cans and can components4%4%5%-4%-2%2%1%1%2%70%
105Plumbing fixtures and fittings3%5%2%0%1%2%2%2%2%100%
106Heating equipment3%5%2%1%2%3%2%2%3%100%
1062Furnaces and heaters, including parts5%5%1%-1%1%2%2%2%2%85%
1072Metal tanks4%10%-8%0%-1%0%1%0%2%70%
1075Heat exchangers and steam condensers3%6%1%0%4%2%3%2%3%90%
1077Stationary and marine power boilers6%7%2%1%0%3%2%2%3%85%
1081Bolts, nuts, screws, rivets, and washers4%4%0%1%1%2%1%1%2%80%
112Construction machinery and equipment2%3%1%1%1%2%2%2%2%95%
1133Welding machines and equipment2%6%3%1%1%3%3%2%3%95%
1136Abrasive products4%2%2%1%1%2%2%2%2%95%
1138Metal forming machine tools4%1%1%0%1%1%1%1%2%90%
113BRolling mill machinery3%12%1%-7%0%2%1%1%2%65%
114General purpose machinery and equipment2%4%2%1%1%2%2%2%2%100%
1142Elevators, escalators, and other lifts4%3%3%2%1%2%2%1%1%80%
1147Air purification equipment and industrial and commercial fans and blowers3%5%1%0%2%2%2%2%2%95%
1148Air conditioning and refrigeration equip4%5%2%1%1%3%2%2%2%90%
1169Commercial laundry and drycleaning machinery products3%3%2%1%2%2%2%2%3%100%
1175Switchgear, switchboard, industrial controls equipment3%2%1%0%1%1%1%1%2%90%
1181Automatic environmental controls for monitoring residential, commercial, and appliance use3%5%1%2%0%3%1%1%1%80%
1192Mining machinery and equipment3%8%1%2%1%4%3%3%4%100%
1211Metal household furniture3%-2%2%4%3%1%2%1%1%70%
1223Public building furniture4%5%1%1%2%2%2%2%2%90%
1224Commercial furniture and fixtures, n.e.c.5%-1%2%1%5%1%2%1%2%90%
1245Portable residential lighting fixtures, including parts and accessories11%3%1%-1%3%1%1%2%2%75%
1269Window shades, blinds, and accessories3%-1%2%0%3%0%1%2%2%80%
132Concrete ingredients and related products4%4%4%5%4%4%4%3%4%95%
1321Construction sand, gravel, and crushed stone4%4%3%5%4%4%4%3%4%100%
133Concrete products3%3%3%3%3%3%4%2%3%85%
1331Concrete block and brick3%3%3%2%2%3%3%2%3%90%
135Refractories4%7%0%1%1%2%2%2%3%90%
1413Truck and bus bodies4%4%1%1%1%2%2%1%2%95%
1414Truck trailers3%8%1%-1%2%3%2%2%2%85%
1432Boats3%3%3%1%3%3%3%2%3%100%
152Tobacco products, incl. stemmed & redried4%6%5%5%5%5%5%5%4%90%
155Mobile homes8%2%8%1%2%3%3%3%3%100%
1565Dental equipment and supplies9%1%7%2%3%3%3%4%4%100%
1591Burial caskets4%3%3%4%3%3%3%3%4%100%

LIFO-PRO’s Top 15 LIFO Candidates of 2019: by Three-digit BLS PPI Code

PPI CodePPI Category DescriptionYTD '191Y '181Y '171Y '161Y '153Y Avg.5Y Avg.10Y Avg.20Y Avg.Inf. Freq. Rate*
056Crude petroleum (domestic production)9%-10%14%47%-44%15%-12%3%9%65%
057Petroleum products, refined4%-4%24%12%-32%10%-8%3%8%65%
152Tobacco products, incl. stemmed & redried4%6%5%5%5%5%5%5%4%90%
132Concrete ingredients and related products4%4%4%5%4%4%4%3%4%95%
155Mobile homes8%2%8%1%2%3%3%3%3%100%
135Refractories4%7%0%1%1%2%2%2%3%90%
062Paints and allied products3%5%3%0%-4%3%1%2%3%85%
133Concrete products3%3%3%3%3%3%4%2%3%85%
106Heating equipment3%5%2%1%2%3%2%2%3%100%
086Prefabricated wood buildings & components2%4%4%2%2%3%3%2%3%85%
114General purpose machinery and equipment2%4%2%1%1%2%2%2%2%100%
105Plumbing fixtures and fittings3%5%2%0%1%2%2%2%2%100%
112Construction machinery and equipment2%3%1%1%1%2%2%2%2%95%
122Commercial furniture2%6%1%1%1%3%2%2%2%90%
118Miscellaneous instruments2%2%2%2%1%2%2%2%2%100%

LIFO-PRO’s Top 5 LIFO Candidates of 2019: by Two-digit BLS PPI Code

PPI CodePPI Category DescriptionYTD '191Y '181Y '171Y '161Y '153Y Avg.5Y Avg.10Y Avg.20Y Avg.Inf. Freq. Rate*
02Processed foods & feeds2%1%0%0%-6%1%0%1%2%85%
11Machinery & equipment1%3%1%0%0%1%1%1%1%65%
12Furniture & household durables1%4%2%0%1%2%2%1%1%95%
13Nonmetallic mineral products2%4%2%2%2%3%3%2%3%95%
15Miscellaneous products3%2%2%2%2%2%2%2%2%90%

Source: Bureau of Labor Statistics Preliminary Table 9 Producer Price Indexes
Year to date inflation rates use PPI inflation for the 9 months ended September 2019 (September 2019 ÷ December 2018 PPI); 1Y rates use 12 months ended December PPI
3Y, 5Y, 10Y & 20Y avgs. are for period ended Dec. ’18 & are calculated using compound inflation formula (i.e. 3Y avg = ((Dec. ’18 PPI ÷ Dec. ’15 PPI)^(1/3)-1))
*Inflation Frequency Rate is based on the number of inflationary periods calculated in the last 20 years (2000 – 2019)

Who Should Use LIFO

LIFO-PRO uses the following criteria to determine if a company is a good candidate for LIFO election:

  1. Historical average annual inflation rate greater than or equal to 1% – Inflation is the most important aspect in determining a company’s potential LIFO tax savings.
  2. Consistent inflation – LIFO-PRO’s criteria used to measure consistency is to determine if a company would have had inflation in 11 or more of the past 20 years. LIFO-PRO’s method of determining this is using the following data to measure the inflation that would have resulted in each of the prior 20 years:
    • Current period inventory balances & product mix
    • Bureau of Labor Statistics (BLS) Producer Price Index (PPI) inflation categories
  3. At least $1 – 5 million of inventory – A company with $1 million in inventory & 5% historical average annual inflation would accumulate a LIFO reserve of approximately $1 million over a 20-year period, meaning their income tax reduction would be somewhere in the range of $200,000 – $350,000. The same could be said of a company with $5 million of inventory and 1% average inflation.

Choosing the Right Time to Elect LIFO

Timing is key when making a LIFO election because it will affect the amount of current & future period’s tax savings achieved. The point of emphasis is to understand the working parts that goes into determining the potential LIFO benefits. Although meeting the three criteria listed above would likely indicate that a company is a good LIFO candidate at some point in time, both the three criteria above along with the following criteria below should be met to make a LIFO election in the current period:

  • Current year inflation rate is expected to be greater than or equal to 1%
  • Current year profit is expected to be reported
  • Significant inventory level drop not expected in the next period

Based on the above-listed criteria for choosing the right time to elect LIFO, it would be unwise to make a LIFO election in the current period if any of the following are true:

  • Current period inflation rate is expected to be less than 1%
  • Current period net operating loss is expected to be reported
  • Significant inventory level drop expected in the next period

To recap, the following criteria should be met to make a LIFO election for your company’s upcoming year end:

  1. Historical average annual inflation rate is greater than or equal to 1%
  2. Consistent inflation (11 or more of the past 20 years)
  3. At least $1-5 million in inventory
  4. Estimated year-to-date inflation is greater than or equal to historical average annual inflation rate

For companies with inflationary inventories, LIFO acts like an annuity that provides annual returns, and the long-term benefits can be substantial. Choosing the right time to start using LIFO will allow your client or prospective client to maximize the tax benefits that it provides.
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