The current economic landscape in the U.S. is unwieldy, as the country experiences continued high inflation (though it has lowered from 2022 peaks). In fact, the Consumer Price Index (CPI) for all items increased by 0.4% in December 2024 on a seasonally adjusted basis, reported by the U.S. Bureau of Labor Statistics,1 which brought the 12-month index to 2.7%. These realities of rising costs—coupled with tariffs—touch all industries.
In regard to manufacturing, the outlook is ambiguous as current and potential tariffs ensue. For example, the Biden administration increased tariffs on solar panel wafers and other critical products from China that went into effect on January 1, 2025.2 In addition, the Trump administration imposed a 25% tariff on Canadian and Mexican imports, as well as an additional 10% tariff hike on all Chinese imports effective February 1, 2025.3 However, the overall environment continues to evolve. As of this writing, the latest tariffs are set to go into effect on April 2, 2025. Given these changes and ongoing regulatory discussions, there are many factors that can significantly impact manufacturer operations and inventory. However, there are actions your manufacturing business could take to help protect itself amid rising costs and anticipatory regulations. Evaluating these factors and considerations can also help you capitalize on a better way to track and value your inventory.
This article will explore the definition of tariffs, how it applies to inventory management, and then share options such as FIFO, LIFO, and method changes for manufacturers to prepare for potential tariffs and/or periods of increased uncertainty.
An Overview of Tariffs
Tariff talk is abundant and buzzier than ever in the news. At their most basic form, tariffs are simply a tax on imports. They are usually charged as a percentage of the price a buyer pays a foreign seller.4 The U.S. Customs and Border Protection agents at 328 ports of entry across the U.S. collect tariffs, though tariff rates vary based on trade agreements.
Historically, tariffs were a major source of revenue for many countries and were often the primary source of federal revenue through the late 19th century.5 Today, other taxes account for most government revenue in developed countries. Tariffs are now typically used selectively to protect certain domestic industries, advance foreign policy goals, or as negotiating leverage in trade negotiations.6
Congress often works with the president to set tariff policy by authorizing the president to negotiate trade agreements and adjust tariffs in certain circumstances.7
By increasing the price of imports, tariffs can protect home-grown manufacturers.8 However, economists and financial executives note that tariffs can raise costs for companies and consumers that rely on imports.9
Impacts of Tariffs
When thinking about the implications of the changing economic landscape, manufacturers may choose several paths to prepare for potential tariffs. Many companies have already begun to diversify their product vendors through outsourcing or co-sourcing, while others may buy up overseas supplies in bulk and store them for future use before additional tariffs come into effect. In either case, manufacturers may find themselves with higher inventory levels than they are used to maintaining and may seek an inventory valuation to better understand their stored assets.
Whether or not your business takes one of these actions, this is still a good time to re-evaluate where you are at with your inventory and revisit various tax treatments on inventory.
Inventory Valuation Options
There are a few accounting considerations that companies should keep in mind concerning their inventory. As manufacturers buy and sell inventory, they must be able to appropriately value their inventory to be reported on their financial statements and tax returns. While there are many methodologies, the two detailed in this article are first-in, first-out (FIFO) and last-in, first-out (LIFO).10 Both methodologies can impact a company’s profitability, as well as have varying tax implications.
While companies typically do not change from one method to another, there are times when it is beneficial to gauge whether an accounting method change is advantageous for your company.
Now, let’s look at the inner workings of these methods and how they may help your business.
First-In, First-Out (FIFO)
FIFO is an inventory accounting method that assumes the first goods produced, manufactured, or purchased are also the first ones to be sold by a company.
FIFO’s goal is to reduce waste by selling older products first and lower the chance of obsolete stock. As older inventory is cycling out, the method often gives manufacturers a more accurate snapshot of a business's finances, as the prices they currently pay for raw materials are reflected in their inventory listing and can, therefore, drive more accurate gross margins.
The critical element of FIFO is when inventory is sold—the oldest inventory is the first to be used. For manufacturers working amid rising costs, it can be desirable to cycle out their older, lower-cost inventory to accurately portray their current, higher costs. The more recently purchased supply remains, which in a period of inflation results in the more expensive products composing your inventory.
From a financial statement perspective, applying FIFO may build a stronger balance sheet in this current economic climate. The more expensive inventory purchased most recently will be on your books at the end of a reporting period. This also drives the recording of higher profit since selling older inventory results in a lower reported cost of goods sold (COGS).
However, it is worth noting that because this method results in a lower recorded COGS per unit, it also records a higher level of pretax earnings for the company—meaning an increase in the chance of a higher tax liability.
Last-In, First-Out (LIFO)
From a tax perspective, companies may find LIFO more appealing, especially during times of rising costs. This method uses current prices to calculate the COGS instead of what the company paid for the inventory already in stock,11e.g., if the price of goods has increased since the initial purchase, then the cost of goods will be higher, thus reducing profits and tax liability. Nonperishable goods, such as manufacturing materials like metals or petroleum, tend to utilize LIFO when feasible. LIFO produces a lower valuation than present-day prices, since leftover inventory may be old or obsolete. This also could result in a lower tax liability for the company.
From a financial statement perspective, applying LIFO may improve a company’s cash flow by reducing its tax obligations, allowing manufacturers to retain more cash for additional inventory purchases, debt repayment, or operational needs. It also can provide a more realistic view of profitability for owners and shareholders by better matching current costs with current revenues. This can be more beneficial during inflationary periods, as it demonstrates a more accurate picture of a company’s actual earnings during a period. It is a more conservative representation of the balance sheet, as inventory is valued at the lower, older cost, though the inventory may have a higher risk of obsolescence due to its aged status.
LIFO is one of the more complex methodologies from a tax standpoint, requiring companies to file Form 970 in the first year a company intends to file a return with the LIFO method. Annual calculations to determine proper inventory cost adjustments must be made to help ensure compliance with regulatory requirements of LIFO. Multinational organizations may also need to consider that LIFO is not an accepted inventory valuation method under International Financial Reporting Standards and whether choosing LIFO for their U.S. entity is an appropriate choice.
How Accounting Method Changes Can Help Your Business
If a company decides to change the way it values its inventory to LIFO, a formal request for a method change must occur. This starts with filing Form 970 with the IRS to apply for this method change, as this change to LIFO is deemed a non-automatic method change.12 A change to LIFO is a prospective change, meaning there is no traditional 481(a) adjustment that you see with most method changes. In addition, certain calculations must be completed on a yearly basis to help ensure compliance with LIFO’s complex regulatory requirements. Taxpayers also can opt to revert to their original method after remaining on LIFO for a minimum of five years.
In addition, changing inventory methods has an impact on a company’s financial statement presentation. Under U.S. GAAP, a change in inventory method is considered a change in accounting principle, not a change in accounting estimate. This requires a retrospective adjustment to the financial statements of the earliest reported period presented. Companies looking to change their method for valuing inventory should plan ahead and work with their accountants and advisors to gather all the necessary inventory data under both the old and new valuation methods. Retrospective adjustments will have an impact on a company’s prior-period COGS, gross margin, net income, and retained earnings.
Conclusion
Tariffs continue to be an industry-agnostic hot topic, along with discussions of rising costs and inflation. However, certain accounting methods can help manufacturing companies prepare for uncertain times and are applicable outside of tariff discussions.
FIFO and LIFO can be utilized from a tax lens, i.e., cost savings, with varied impacts on a company’s audited financials. Companies must decide what is best for their business and what aligns with their goals, and now is a great moment to re-evaluate how you are tracking inventory. Manufacturing companies may want to consider management needs, access to capital, third-party stakeholders, and financial and regulatory transparency when making these decisions.
If you have further questions on FIFO, LIFO, or other accounting considerations, please reach out to a professional at Forvis Mazars.
- 1“U.S. Inflation Rates Over Time and the Forecast for 2025,” money.usnews.com, January 16, 2025.
- 2“US Hikes Tariffs on Imports of Chinese Solar Wafers, Polysilicon and Tungsten Products,” bostonherald.com, December 12, 2024.
- 3“Trump Eyes 10% China Tariff Hike by Feb. 1,” supplychaindive.com, January 22, 2025.
- 4“What Are Tariffs and How Do They Work?,” apnews.com, January 27, 2025.
- 5“U.S. Tariff Policy: Overview,” crsreports.congress.gov, December 19, 2024.
- 6“U.S. Tariff Policy: Overview,” crsreports.congress.gov, December 19, 2024.
- 7“U.S. Tariff Policy: Overview,” crsreports.congress.gov, December 19, 2024.
- 8“U.S. Tariff Policy: Overview,” crsreports.congress.gov, December 19, 2024.
- 9“U.S. Tariff Policy: Overview,” crsreports.congress.gov, December 19, 2024.
- 10“Understanding the Tax Treatment of Inventory: The Role of LIFO,” taxfoundation.org, October 12, 2022.
- 11“FIFO vs. LIFO – What is the Difference?,” businessnewsdaily.com, January 5, 2024.
- 12“What is a Section 481(a) Adjustment and How Does it Work?,” accountinginsights.org, January 29, 2025.