Tariffs & LIFO Series: Part Two
In part one of LIFOPro’s three-part series on tariffs titled How to Use LIFO to Create Tax Benefits from Tariffs, we covered the basics about how LIFO works, why companies use the LIFO method, and why the subject of tariffs will likely drive meaningful, if not historic inflation and tax benefits for those who make first-time LIFO elections for the 2025 tax year. In this series, we’ll dive deeper into the mechanics behind LIFO, establish LIFOPro’s key performance indicators for measuring LIFO’s preferability and election timing, and the specifics regarding how recently imposed tariffs on goods imported into the U.S. will offer meaningful tax benefits for companies considering electing LIFO for the 2025 year end.
Current Tariff Environment
As of May 2025, the United States has implemented a series of significant tariff increases affecting a broad range of imported goods. Here is an overview of the current tariff landscape:
- Average Effective Tariff Rate: Currently stands at 17.8%, the highest since 1934. This reflects a substantial increase from pre-2025 levels, primarily due to recent policy changes.
- General Import Tariff: A 10% blanket tariff has been imposed on all imports, regardless of origin.
- Steel and Aluminum: Imports of steel and aluminum are subject to a 25% tariff across all countries.
- Tariffs on Chinese Imports
- Section 301 Tariffs: Additional duties ranging from 25% to 100% have been imposed on various Chinese goods under Section 301 actions.
- Temporary Reduction: As part of a recent truce, tariffs on Chinese imports have been temporarily reduced to a baseline of 30%, excluding certain existing duties.
- Tariffs on Mexican Imports
- General Tariff: A 25% tariff is applied to most Mexican goods.
- USMCA Exemptions: Goods that meet USMCA requirements continue to enter duty-free.
- Tariffs on Imported Vehicles and Auto Parts
- Passenger Vehicles: A 25% tariff has been imposed on imported passenger vehicles, effective April 3, 2025. This is in addition to the existing 2.5% base tariff, resulting in a total tariff of 27.5% for passenger cars from countries without a U.S. free trade agreement.
- Light Trucks: Light trucks from countries without a U.S. free trade agreement are subject to a 50% total tariff, combining the new 25% tariff with the existing 25% base tariff.
- Automotive Parts: A 25% tariff applies to imported automotive parts, effective May 3, 2025. This includes key components such as engines, transmissions, powertrains, and electrical systems.
- Tariffs on Japanese Imports: Japanese automobiles are currently subject to a total import tariff of 27.5%, which includes the existing 2.5% base tariff plus the 25% additional tariff imposed in April 2025.
- USMCA Exemptions: Vehicles and parts imported from Canada and Mexico that comply with the United States-Mexico-Canada Agreement (USMCA) rules of origin are exempt from these tariffs. However, the 25% tariff applies to the non-U.S. content in these imports.
Imports of Goods to U.S.
According to the U.S. International Trade Commission, $3.3 billion of commodities were imported into the United States in 2024. The top 20 countries importing goods into the United States is shown in Table 1 below.
Table 1. Top 20 Countries Importing Goods into United States, 2024
Source: U.S. International Trade Commission: DataWeb
The top imported goods by North American Industry Classification System Grouping is shown in Table 2 below, which also provides a breakout of the import value by the top five countries in terms of 2024 import value.
Table 2. 2024 Value of U.S. Imports by Selected North American Industry Classification System (NAICS) Grouping
Source: U.S. International Trade Commission: DataWeb
Who Should Use LIFO & When Should the Election be Made?
LIFOPro has designed key performance indicators or KPIs to assist with scoping out LIFO elections. This allows for the most objective assessment to be made when exploring a LIFO election, and provide the following:
- Forecast long-term LIFO tax benefits
- Forecast probability, frequency and level of future risks and rewards
- Estimate the current year tax benefit of adopting and LIFO, including providing the values required to record an estimated LIFO adjustment for financial reporting purposes
- Provide LIFOPro’s opinion regarding the preferability and use of the LIFO method
- Provide LIFOPro’s recommendations on the timing of the LIFO election, and submethods to be used
Our LIFO KPIs can be broken down into two groups. The historical KPIs use past inflation data to model or forecast LIFO’s future tax benefits, gauge potential risks against the rewards and offer useful insights that can be used to develop reasonable mid to long term expectations on the impact of using LIFO. The current KPIs use this year’s inflation data to estimate the tax benefits of electing LIFO for the upcoming year end. The current KPIs also provide perspective in regards to how this year’s inflation environment and LIFO tax benefits compare to a normal period of inflation, and assist in choosing the most beneficial time to elect LIFO.
Historical KPIs
- Historical Average Annual Inflation Rates: This KPI is one of the two criteria used to establish the preferability of the LIFO method. It’s also used to forecast the size of future LIFO tax benefits.
- Historical Inflation Frequency: This KPI is the second of the two criteria used to establish the preferability of the LIFO method. It’s also used to forecast how often LIFO can be expected to create a tax benefit, and how frequently deflation may create LIFO recapture (increase to taxable income).
- Estimated 20 Year LIFO Reserve and Tax Benefit: These values are used to forecast the cumulative taxable income reduction (LIFO reserve) & tax benefit that can be expected from using LIFO over the next 20 years. It’s also used to forecast the average annual taxable income reduction (LIFO expense) & tax benefit that can be expected from using LIFO over the next 20 years.
Current KPIs
- Year to date inflation rate: Used to calculate the current year taxable income reduction & tax benefit that would occur if a LIFO election were made for the upcoming year end & also assists in determining the timing of the LIFO election
- Current Year LIFO Expense/Reserve: This KPI represents the current year taxable income reduction that would occur if T&A Supply elected LIFO for the 2024 year end.
- Election Year LIFO Tax Benefit Multiplier: Assists with determining LIFO election timing as it shows how much higher/lower or comparable the current period LIFO tax benefits are vs. historical norms.
The above KPIs provide a basis for determining whether or not the use of the LIFO method is preferable for a given industry, company or specific good/product, and also provides a basis for recommending the timing of the LIFO election. LIFOPro’s preferability and election timing requirements are as follows:
- LIFO Preferability Criteria
- Historical average annual inflation rate must be greater than or equal to 1% (20 year average used)
- Historical inflation frequency must be greater than or equal to 50% (inflation in 10 or more of 20 years)
- LIFO Election Timing Criteria
- All LIFO preferability criteria met
- One or both of the following must be met:
- Election year LIFO tax benefit multiplier value of greater than or equal to 1 (which indicates the current period’s inflation & LIFO tax benefits is as much or more than the historical averages)
- Current year inflation rate of greater than or equal to 1%
The LIFO preferability KPIs are designed to forecast the mid and long term benefits & costs of using LIFO based on historical pricing and inflation data. They’re also designed to establish that the use of the LIFO method is recommended from both a conceptual and tax benefits perspective. For example, deflation occurs more often than inflation in certain industries, and because of this, the use of the LIFO method would not be considered preferable based on our KPIs because compared to non-LIFO method alternatives, it should be expected to create an additional tax burden rather than a benefit, and it’d fail to be most clearly reflective of income. The preferability KPIs also assist in forecasting the mid to long term risks and rewards LIFO, modeling the size of future benefits and gauging the probability of any potential downsides from using LIFO.
The Current KPIs & LIFO election timing criteria are designed to estimate the effect of using LIFO in the short-term. They can be used to determine this year’s taxable income reduction & tax benefits that’d occur if the LIFO method were elected for the upcoming year end. They also provide a basis for our recommendations regarding if a LIFO election should be made this year or in the future.
For example, a company with a 10% current year inflation rate & a 2% 20 year average annual inflation rate would have a 5x LIFO tax benefit multiplier because the current year inflation and resulting tax benefit will be 10% ÷ 2% or five times higher than a normal or average period of inflation. To further illustrate, a company with a 1% current year inflation rate & a 2% 20 year average annual inflation rate would have a 0.5x LIFO tax benefit multiplier because the current year inflation and resulting tax benefit will be half of what it would be during a period of normal inflation. For CPA firms seeking to prioritize the resources committed towards LIFO tax planning, the LIFO election tax benefit multiplier provides an objective means of measuring the value or level of tax benefit from a current period LIFO election.
Which Industries Will Have the Biggest LIFO Tax Benefits from Tariffs in 2025?
The 2025 year-end will be an optimal period to elect LIFO for many industries considering the 20-year average annual inflation rate for the most predominant industries using LIFO is between 2% – 5%, and 10% baseline tariff rate is currently in place on most imported goods. This means that for many industries, the 2025 LIFO election tax benefit multiplier will be at least double the 20-year average annual inflation rate. Since tariffs on imported goods could potentially create record-high inflation rates in certain industries, the biggest LIFO tax benefits will likely occur within companies with the highest concentration of goods that are subject to tariffs, and those carrying goods with the highest tariff rates.
Shown below is LIFOPro’s table of the 2025 Top LIFO Election Candidates which includes the most recent inflation rates, historical averages and LIFOPro’s KPI’s. This data was organized by North American Industry Classification System (NAICS) groupings published by the Producer Price Index division of the Bureau of Labor Statistics). Notable values included in the table are as follows:
- Year to date (YTD) inflation rate: Calculated based on the most recently published Bureau of Labor Statistics Producer Price Index inflation data (BLS PPI). Multiplying this rate by last year’s inventory balance provides an estimate of the taxable income reduction from electing LIFO for the 2025 year end.
- Good LIFO candidate: Indicates the LIFO method is preferable based on LIFOPro’s preferability criteria being met
- 2025 Base Tariff Rate: Indicates the current tariff rate imposed on the given NAICS grouping
- 2025 LIFO Tax Benefit Multipliers
- YTD Inflation Multiplier: Is the quotient of the 4 months ended April ’25 inflation and the 20 year average annual inflation rate. A value of greater than 1 represent groups where the current period inflation & LIFO tax benefits are higher than the historical averages.
- 2025 Base Tariff Rate Multiplier: Is the quotient of the 2025 base tariff rate against the 20 year average annual inflation rate. Provided to highlight the industries with the highest multiplier values as they likely represent the best LIFO election opportunities when compared to historical norms.
Table 3. LIFOPro’s 2025 Top LIFO Election Candidates
Source: Bureau of Labor Statistics Producer Price Index
Note: Groups highlighted in red above are not good LIFO candidates because they do not meet LIFOPro’s preferability criteria. Accordingly, use of the LIFO method is not recommended for companies whose product mix primarily consists of goods that fall within these groupings.
How to Estimate LIFO Tax Benefits
From a tax perspective, LIFO is a straightforward concept in the sense that it reduces taxable income whenever there’s inflation (exception is if there’s a material liquidation in the current vs. prior year’s inventory balance). Furthermore, the amount of the tax benefit created from electing LIFO is fairly simple. The most common formulas used to estimate the election year tax benefits from LIFO are as follows:
- Election year taxable income reduction (aka LIFO expense): Prior year inventory balance * Current year inflation rate
- Election year tax benefit (tax liability reduction aka after-tax cash savings): Election year LIFO expense * combined federal + state tax rate (LIFO reduces both federal & state income tax liability)
Shown below are examples illustrating the tax benefits of LIFO assuming an election is being made for the 2025 year-end. All three scenarios assume a 10% inflation rate, 30% combined federal & state tax rate & 7.5% interest rate on debt. The first scenario assumes the 2025 year-end inventory balance was $1M higher than the 2024 year-end balance. The second scenario assumes the current vs. prior year inventory balance is unchanged, and the third scenario assumes a $1M year over year inventory decrease or reduction.
Figure 1.1 LIFO Tax Savings Example – 12/31/2025 Election
Figure 1.2 Suggested LIFO Journal Entry – 12/31/2025 Election
Note: Scenarios above showing Current vs. Prior year inventory balances remaining unchanged or decreasing shown to illustrate that a LIFO tax benefit can occur even when the current vs. prior year’s inventory balance at cost (FIFO, average cost) is the same or decreases. See LIFOPro’s Blog for further information on this subject: How LIFO Reserve Changes are Calculated
Since most companies continue using the LIFO method subsequent to the initial period of adoption, it’s important to establish mid and long-term forecasts of the effect of LIFO prior to adoption. Furthermore, doing so allows one to understand both the risks and rewards of the LIFO method. For example, when deflation occurs, LIFO will typically increase rather than decrease taxable income, and when this occurs, a portion of the LIFO tax benefits will be recaptured into income. Since this is the case, performing or obtaining LIFO benefit analysis that provides a forecast of the effect of deflation in future periods as well as the potential frequency and size of future LIFO recapture is extremely valuable for planning and risk assessment purposes.
The two examples provided below are 20-year forecasts of a company’s LIFO reserve beginning with the 2025 year-end using the company’s product mix as of that same period year end and historical inflation rates from the each of the past 20 years (2006 – 2025). Both examples assume a 20-year average annual inflation rate of about 2%, and an inflation frequency rate of 80% (inflation was measured in 16 of 20 years). As seen below, deflation occurred in 2026, 2032, 2039 and 2042, and in all four of those periods, LIFO income (LIFO reserve decrease) occurred during those periods. Despite this occurring, the company’s LIFO reserve grew exponentially over the 20-year period, and the four periods of deflation were fairly insignificant in comparison to the overall LIFO reserve increase that occurred during the 20-year period.
Figure 3 assumes that inventory balances change at about the same pace of inflation during the 20-year period. Figure 4 assumes that inventory balances remain the same over the 20-year period. Both examples are provided to illustrate an important point that the LIFO reserve will continue to increase even if inventory balances remain the same over a long period of time (common misconception is that the LIFO reserve can only grow when inventory balances grow, which is not true). Also included below each table are breakdowns of the of the annual outsourcing fee paid to have a third party such as LIFOPro manage all aspects of the company’s LIFO calculation, which is provided for purposes of measuring the benefits vs. costs and return on investment from LIFO.
Figure 3. LIFO Tax Savings Example – 20 Year Projection: YOY Inventory Balances Increase
Figure 4. LIFO Tax Savings Example – 20 Year Projection: YOY Inventory Balances Constant
Note: Figure 4 shown to illustrate that a LIFO tax benefit can occur even when the inventory balance at cost (i.e. FIFO, average cost) remains stays the same over a long period of time (same would occur if inventory balances decreased over a long period of time as opposed to staying the same or increasing, but total LIFO tax benefit would be less).
Key Takeaways
- New tariffs imposed on goods imported into U.S. will likely create above average inflation & tax benefits from electing LIFO in 2025
- LIFO Key performance indicators or KPIs provide powerful insights for companies and CPA firms exploring LIFO elections
- The most ideal time to elect LIFO is when the tax benefits are greater than or equal to the historical averages
- Thorough benefit analysis should be performed prior to adopting to establish the preferability of LIFO, assessing rewards vs. risks, estimate current year LIFO tax benefit, forecast future tax benefits and determine the best time to elect LIFO
Actionable Items
- Follow part one and three of our series on tariffs & LIFO
- Learn more about LIFO by scheduling a discovery call with the LIFOPro team
- Explore a LIFO election by obtaining a complimentary LIFO election benefit analysis from LIFOPro