"LIFO makes for a smaller tax under conditions of inflation". Can you please give me an example?

Question

Can you give me an example? With the tax rate of e.g. 10% ?

Answer 1

Let's say you are buying widgets for re-sale. Since there is inflation, each set of widgets you buy costs more than the one before. LIFO means you are selling the most recently purchased (i.e. most expensive) widgets first. That means your Cost of Goods Sold will be higher.

Since your costs are now higher, that means your net income will be lower, which means your tax will be lower. It doesn't matter what the tax rate is, this will always be true.

Answer 2

You bought paintbrushes for your store. You sell paintbrushed for $2 each.

2005 wholesale cost was $1 per brush

2006 wholesale cost is $1.10 each (10% Inflation)

Assuming that you do not also increase prices to keep up for inflation,

FIFO gross profit is $1 per brush sold
LIFO gross profit is $.90 per brush sold

Therefore all other things being equal (expenses and such) LIFO in this example would make your taxable income lower!