How does the "LIFO" inventory method typically affect taxes during inflation?

The "LIFO" (Last In, First Out) inventory method typically results in lower taxes during periods of inflation. This is due to the way that LIFO accounts for inventory costs. When prices are rising, the most recently purchased (and usually higher-cost) inventory items are the ones that are considered sold first under this accounting method.

As a result, the cost of goods sold (COGS) is higher because it reflects the more expensive inventory that has been sold. This higher COGS reduces the company's taxable income since profits are calculated as revenue minus expenses, which results in lower taxable income and, therefore, lower taxes.

In contrast, if a company uses the FIFO (First In, First Out) method, the older, less expensive inventory costs would be accounted for first. This typically leads to a lower COGS during inflation, resulting in higher taxable income and potentially higher taxes. Thus, the LIFO method can provide a tax advantage during times of rising prices by deferring tax liabilities due to lower reported profits.