By Charles R. Kennedy, CPA, MBA
Vice President & Director of Tax Services

James J. DeLuca, CPA, MST
Senior Tax Manager

With inflation at an annualized 7.5%, businesses and consumers are searching for cost savings wherever they can. Besides holding the line on wages and regular business expenses, business owners may consider several potential accounting and tax strategies that could benefit them during inflationary times. Here are a few:

LIFO — Under the last-in, first-out (LIFO) method of accounting, ending inventory is assumed to be the first items purchased, thereby carrying an artificially low value. Product that is sold during the year is assumed to have been recently purchased, carrying a higher cost. This assumption increases the cost of goods sold and, when applied against inflated revenues, reduces taxable income.

If your company currently uses the first-in, first-out (FIFO) method of inventory accounting, switching to LIFO should not be undertaken lightly. There are technical requirements as noted below, as well as some disadvantages.

Technical requirements for using LIFO:

• The taxpayer must first value inventory at cost as opposed to any other valuation method. Any increase in inventory value will need to be brought into inventory over three years.
• LIFO must be used for financial reporting to shareholders and creditors.
• The taxpayer must maintain sufficient records to support the LIFO calculation.
• The taxpayer must adhere to formal election requirements.

Disadvantages to the LIFO method include:

• Once adopted the LIFO inventory method cannot be changed within five years of the election.
• The LIFO method is typically more difficult to apply than other inventory methods.
• A taxpayer cannot change from the LIFO method to another inventory method without IRS approval.

Solar tax credits — The purchase and installation of solar panels still qualifies for a federal tax credit of 26% of the cost of the solar project. While that is advantageous, the ability to generate electricity to offset rising electrical costs is further benefit. The kilowatts generated remain the same but are offsetting what are sure to be higher electrical costs that would be purchased from your electric provider. Locking in panel prices today before costs go up is also important. Naturally, the greater the electrical need, the larger the solar project, and the larger are the savings as terms of solar credits and electrical bills. The federal tax credit is taken in the year the project is put into use; for 2022 the federal credit is 26%. This drops to 22% for 2023, however, the rate of the credit is determined when the project is started rather than when completed.

Interest expense — Many businesses have utilized lines of credit at historically low interest rates. However, that environment is rapidly changing and those variable interest rates on lines of credit can quickly rise. Now is the time to consider terming out a part of the line of credit for a fix rate loan. One option is to shift loans on machinery and equipment that previously had been paid for on the line of credit over to a fixed term loan. These are all efforts to minimize increases in interest rates.

Costs for leased space — Are more of your people working from home either full-time or part-time these days? It may be time to re-evaluate how much space you need if you are leasing. Realigning your space rental to reflect the true usage could shave a considerable amount off your monthly expenses. Since most leases are multi-year, you may not be able to implement this change immediately. Subleasing part of your space in the interim is an option to generate income – another inflation-fighting strategy.

If you would like to have a conversation about inflation fighting strategies for your business, please contact us.