How to Convert LIFO to FIFO: Form 3115 and the Four-Year Pickup

To convert from LIFO to FIFO, you file Form 3115 with the IRS as an automatic accounting method change, calculate your LIFO reserve as a Section 481(a) adjustment, and pick that adjustment up in taxable income ratably over four years. Consent is automatic if you follow the procedure, but the reserve itself becomes fully taxable, so the real question is not whether the IRS will let you switch. It is how much you will owe and when.

Calculate the LIFO Reserve

The LIFO reserve is the gap between the inventory value on your books under LIFO and what that same inventory would be worth under FIFO on the last day of the tax year before the switch. FIFO will almost always produce the higher number, because LIFO leaves older, cheaper costs sitting on the balance sheet while newer, higher costs flow through cost of goods sold. The difference is every dollar of income you deferred over the life of the LIFO election, and it becomes the adjustment you report to the IRS.

This is not a quick estimate. You need to restate every LIFO layer under FIFO cost-flow assumptions, which usually means deflating LIFO values to base-year costs and rebuilding them at FIFO prices. Each dollar-value pool is handled separately. If your LIFO election goes back decades, the layering history is the most labor-intensive piece of the whole conversion.

Keep the work papers. Every pool, every layer, every price index. The reserve figure is the single most important number on the application, and the IRS reviews these calculations during examinations. Errors here produce penalties and adjustments that outweigh whatever it costs to do the math carefully the first time.

Check Section 263A Before You File

Before filing to change the inventory method, confirm you are complying with Section 263A, the uniform capitalization rules. If your business is required to capitalize certain costs into inventory under UNICAP and has not been doing so correctly, the IRS generally requires you to fix that on the same Form 3115 as the LIFO change.¹

That matters because it changes the size of the Section 481(a) adjustment. If you were already fully compliant with UNICAP, the adjustment is just the LIFO reserve. If not, the adjustment combines the reserve with any costs that should have been capitalized but were not. Either way, Form 3115 must include Schedule D, Part III, detailing your cost allocation method under Section 263A.¹

File Form 3115

The application is IRS Form 3115, Application for Change in Accounting Method.² A change from LIFO to FIFO is an automatic change, so you do not wait for individual IRS approval. File the form, follow the procedures, and consent is granted automatically, subject to later review.¹ No user fee applies.

The Designated Change Number is 56, which covers a change from the LIFO inventory method under Section 472.³ Enter it on Line 1a of Schedule A. Older guides sometimes reference DCN 75, which is a different inventory change; using the wrong number can get the form rejected.

The net Section 481(a) adjustment goes on Part IV, Line 26. For a LIFO-to-FIFO conversion, this will be a positive number.¹ Complete Schedule D, Part II for the LIFO change and Part III for Section 263A. Describe both the old LIFO method and the new FIFO method in Part III of the form, attach work papers showing how the reserve was calculated, and include a statement confirming that you are revoking the LIFO election.

Dual Filing and Timing

Automatic change requests require two filings. Attach the original Form 3115 to your timely filed federal income tax return (including extensions) for the year of change. Send a signed duplicate copy by mail to:⁴

Internal Revenue Service
Ogden, UT 84201
Attn: M/S 6111

The duplicate can be filed no earlier than the first day of the year of change and no later than the date you file the return with the original attached.¹ Missing either filing can invalidate the automatic consent. If you file the return without the original Form 3115 attached, there is no easy fix.

The “year of change” is the first tax year you compute income under FIFO. A calendar-year taxpayer switching for 2026 begins applying FIFO on January 1, 2026, and attaches the original Form 3115 to the 2026 return.

How the Four-Year Income Pickup Works

The LIFO reserve becomes taxable through a Section 481(a) adjustment. Section 481(a) requires adjustments whenever a taxpayer changes accounting methods, to prevent income from being double-counted or skipped.⁵ For LIFO to FIFO, the adjustment is always positive, because LIFO deferred income that FIFO would have recognized.

The statute does not itself set a four-year spread. Section 481(c) delegates that authority to Treasury, and the IRS has established administratively that positive Section 481(a) adjustments are recognized ratably over four tax years: the year of change and the three following years.⁶ Negative adjustments come in fully in the year of change.

A $600,000 LIFO reserve produces $150,000 of additional taxable income in each of four consecutive years. Report the annual piece on the return as other income, labeled as a Section 481(a) adjustment. It is ordinary income, taxed at whatever rate applies that year. That makes timing a real lever: converting during a lower-income year lowers the total tax cost per dollar of the adjustment. Model it before you file.

Events That Collapse the Remaining Balance

Several events can pull any unpaid portion of the adjustment into a single year, eliminating the rest of the spread:

Ceasing to engage in the trade or business before the four years are up. The remaining balance becomes taxable in the year you stop operations.⁶
Electing S corporation status effective for the year of the LIFO change or a later year during the spread.
Certain Section 351 transfers of the business assets within a consolidated group.⁶

This catches people off guard when it coincides with a liquidation or sale. Dissolve the business after year two of the spread and the remaining half hits the final return. If a sale or restructuring is on the horizon, plan around these triggers before you file.

You Cannot Go Back to LIFO for Five Years

Once you convert, you cannot re-elect LIFO for at least five tax years beginning with the year of change, unless the Commissioner grants specific consent based on unusual and compelling circumstances.⁷ The underlying regulation treats a LIFO election as irrevocable once adopted, and any change away from LIFO requires the Commissioner’s authorization through Form 3115.⁸

If commodity prices drop after the switch, you are stuck reporting higher cost of goods sold under FIFO with no way back to LIFO’s deferral benefit for the rest of the waiting period. Weigh that before you commit.

Financial Statements and State Taxes

The LIFO conformity rule requires any business using LIFO for tax to also use LIFO for financial reporting.⁹ Once you revoke the LIFO election for tax, that conformity requirement lifts, and your financial statements have to move too. Under generally accepted accounting principles, a change from LIFO to FIFO is a change in accounting principle that generally requires retrospective application, restating prior-period financial statements as if FIFO had always been used. The financial reporting work runs parallel to the tax conversion and often draws on the same inventory revaluation data, but the disclosure and adjustment mechanics are separate.

State treatment of the federal Section 481(a) adjustment varies. Some states conform to the four-year federal spread; others require the entire adjustment in the year of change. Check your state’s conformity rules before assuming the federal spread flows through everywhere you file.

A Different Rule for C-to-S Conversions

If you are a C corporation on LIFO electing S corporation status, a separate recapture rule under IRC Section 1363(d) applies, independent of the Form 3115 process. The LIFO recapture amount, defined as the excess of the FIFO inventory value over the LIFO inventory value at the close of the last C corporation tax year, must be included in gross income on that final C corporation return.¹⁰

The resulting tax increase is payable in four equal installments. The first is due with the final C corporation return (without regard to extensions), and the next three are due with the S corporation’s returns for the three succeeding tax years. No interest accrues during the installment period as long as you pay on time.¹⁰ This recapture happens automatically upon the S election. If you are a C corporation on LIFO considering an S election, run the recapture calculation before filing Form 2553.

1
Internal Revenue Service. Instructions for Form 3115 – Application for Change in Accounting Method
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Internal Revenue Service. About Form 3115, Application for Change in Accounting Method
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Internal Revenue Service. Revenue Procedure 2022-14
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Internal Revenue Service. Where to File Form 3115
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Office of the Law Revision Counsel. 26 USC 481 – Adjustments Required by Changes in Method of Accounting
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Internal Revenue Service. 4.11.6 Changes in Accounting Methods
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Internal Revenue Service. Revenue Procedure 2024-23
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eCFR. 26 CFR 1.472-5 – Revocation of Election
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Internal Revenue Service. Practice Unit – LIFO Conformity
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Office of the Law Revision Counsel. 26 USC 1363 – Effect of Election on Corporation