IRS Form 970 – Application to Use Lifo Inventory Method

IRS Form 970 – Businesses facing rising costs from inflation and tariffs can achieve significant tax savings by switching to the Last-In, First-Out (LIFO) inventory method. The key IRS document for making this election is IRS Form 970, officially titled Application to Use LIFO Inventory Method.

This comprehensive guide explains everything you need to know about IRS Form 970 in 2026, including what it is, who should file it, benefits of LIFO, step-by-step filing instructions, key requirements, and official resources. All information comes directly from the latest IRS.gov sources (Form 970 Rev. November 2020, last reviewed January 23, 2026) and IRS practice units.

What Is the LIFO Inventory Method?

LIFO assumes that the most recently purchased or produced items are sold first. In periods of rising prices (common in 2026 due to ongoing inflation and potential tariffs), this matches higher recent costs against current revenues.

Result: Higher cost of goods sold (COGS), lower taxable income, and deferred taxes—while older, lower-cost layers remain in ending inventory on the balance sheet.

LIFO vs. FIFO comparison (visualized above): Under FIFO (First-In, First-Out), older cheaper costs go to COGS first—resulting in lower COGS and higher taxes during inflation. LIFO does the opposite, providing a powerful tax deferral tool for U.S. businesses.

Note: LIFO is allowed under U.S. GAAP for tax purposes but prohibited under IFRS.

What Is IRS Form 970?

IRS Form 970 is the official application taxpayers file to elect (or expand) the LIFO inventory method under Internal Revenue Code (IRC) Section 472. You must attach it to your timely filed income tax return for the first tax year you want to use LIFO.

  • Current revision: November 2020 (still active as of February 2026).
  • Download: Official IRS Form 970 PDF
  • OMB No.: 1545-0042
  • Attachment Sequence No.: 122

Form 970 is optional but recommended because it provides a structured way to document your election, specify goods covered, prior methods, pooling approach, and compliance with LIFO rules. The IRS treats a properly completed and attached Form 970 (or equivalent statement) as a valid election.

Who Should File IRS Form 970?

Any taxpayer required to maintain inventories under IRC Section 471 who wants to adopt or expand LIFO for tax purposes. This includes:

  • Corporations (Form 1120)
  • Partnerships (Form 1065)
  • S Corporations (Form 1120-S)
  • Consolidated groups (parent filer)
  • Manufacturers, wholesalers, retailers, and distributors with rising inventory costs

You should consider filing in 2026 if:

  • You face persistent inflation or tariff-driven cost increases
  • Your inventory levels are stable or growing (maximizes LIFO benefit)
  • You can comply with the LIFO conformity rule (see below)

LIFO is not required; it is an elective method. Once elected, you generally must continue using it unless the IRS Commissioner grants permission to change (via Form 3115).

Benefits of Using LIFO in 2026

With elevated inflation and tariffs, LIFO offers:

  • Tax deferral: Higher COGS reduces current taxable income (often by thousands or millions depending on inventory size).
  • Cash flow improvement: Deferred taxes free up working capital.
  • Long-term savings: Benefits accumulate over years as long as inventory quantities do not decline significantly (LIFO liquidation risk).
  • Prospective application: No retroactive §481(a) adjustment—only future layers are affected.

Important 2026 context: Heightened costs make dollar-value LIFO (especially using external indexes like PPI via the Inventory Price Index Computation or IPIC method) particularly attractive, even for businesses without direct tariff exposure.

LIFO Conformity Rule (IRC §472(c))

A critical requirement: If you use LIFO for tax purposes, you must also use LIFO for financial reporting (book purposes), including:

  • Financial statements issued to shareholders, partners, creditors, or for credit purposes
  • Annual reports

Exceptions exist for supplemental disclosures, internal reports, or lower-of-cost-or-market adjustments. Using non-LIFO for books can terminate your LIFO election.

Adopting IFRS (which bans LIFO) also terminates the election.

How to File IRS Form 970: Step-by-Step?

  1. Determine your first LIFO year — The tax year ending date goes on Line 1.
  2. Prepare attachments (required for most filers):
    • Description of goods covered by the election
    • Prior inventory method(s) for those goods
    • Pooling method (specific identification, natural business unit, dollar-value pools, IPIC, etc.)
    • Computation method (double-extension, link-chain, index, etc.)
    • Statement if expanding existing LIFO layers
  3. Complete Form 970 (key sections):
    • Part I – Statement of Election: Specify year, goods, prior method, any existing LIFO use, and excluded goods.
    • Part II – LIFO Inventory Requirements: Confirm prior-year closing inventory was at cost; address any write-down restorations.
    • Additional Parts (for dollar-value users): Pooling details, index method, current-year cost determination (actual recent purchases, average, etc.).
  4. Attach to your tax return — File with your original return for the first LIFO year (or timely amended return).
  5. Maintain records — Keep detailed current-cost listings, base-year costs, and index calculations for every year (required for IRS audits).

Tip: Many businesses outsource LIFO calculations to specialists for accuracy, especially with complex pooling or IPIC.

Key Requirements and Rules

  • Beginning inventory at cost — Must value at actual cost (restore any prior write-downs to market over up to 3 years).
  • No lower-of-cost-or-market for LIFO layers in the adoption year.
  • Adequate records — Supplemental detail for verification (SKU, quantity, current cost).
  • Consistency — Use the elected submethods consistently.
  • Termination risks — Failure to conform, inadequate records, or inventory liquidation can trigger IRS action.

If you are already on a different method and want to switch to LIFO IPIC, you may need Form 3115 (Application for Change in Accounting Method) in addition to Form 970.

Common Questions About IRS Form 970

Can I file Form 970 on an amended return?
Yes, generally within 12 months of the original due date in many cases.

Is there a fee or IRS approval needed?
No pre-approval; the election is made by filing the form with your return.

What if I discontinue LIFO later?
You need IRS consent (Form 3115); LIFO reserve may be recaptured as income.

Do small businesses qualify?
Yes, if they maintain inventories—no size restriction for the basic LIFO election.

Download and Official Resources

Consult a qualified tax professional or CPA before electing LIFO, as the decision has long-term financial statement and tax implications (including potential LIFO recapture on S-corp conversions or asset sales).

Conclusion: Is LIFO Right for Your Business in 2026?

IRS Form 970 provides a straightforward way to unlock LIFO’s tax advantages in an inflationary environment. By filing correctly and maintaining compliance, businesses can achieve meaningful tax deferral and improved cash flow.

Act promptly—LIFO is applied prospectively, so the sooner you elect for 2026 (or your current tax year), the sooner you capture the benefits.

For the most accurate advice tailored to your situation, review the official IRS Form 970 PDF and consult your tax advisor. This guide is for informational purposes only and is not tax or legal advice.