FIFO vs LIFO: What FBA Sellers Need to Know
FIFO vs LIFO refers to two inventory cost flow methods that determine how you calculate cost of goods sold (COGS) for accounting and tax purposes. FIFO (First In, First Out) assumes the oldest inventory costs are expensed first. LIFO (Last In, First Out) assumes the newest costs are expensed first. Amazon physically fulfills orders using FIFO, shipping the oldest units in the warehouse first.
For most FBA sellers, FIFO is the right choice. It aligns with Amazon's physical flow, produces more accurate inventory valuations on the balance sheet, is required under IFRS if you sell internationally, and is simpler to maintain. LIFO can reduce taxable income when costs are rising (like during tariff increases), but requires IRS approval to adopt and adds accounting complexity.
A third option, Weighted Average Cost, averages all purchase costs together. It is the simplest method and works well when unit costs do not fluctuate much between batches. Many smaller FBA sellers use average cost by default because their accounting software handles it automatically.
FIFO vs LIFO Comparison for FBA
| Factor | FIFO | LIFO | Weighted Average |
|---|---|---|---|
| COGS when costs rise | Lower (older, cheaper costs) | Higher (newer, expensive costs) | Middle |
| Taxable income when costs rise | Higher | Lower | Middle |
| Balance sheet accuracy | Best (inventory valued near current cost) | Worst (inventory valued at old costs) | Good |
| Matches Amazon's physical flow | Yes | No | N/A |
| IFRS compliant | Yes | No (prohibited) | Yes |
| Complexity | Moderate (track batches) | High (track layers, IRS rules) | Low |
Worked Example: FIFO vs LIFO Tax Impact
Three purchase batches for the same SKU:
| Batch | Date | Units | Cost Per Unit |
|---|---|---|---|
| 1 | January | 200 | $8.00 |
| 2 | March | 200 | $8.80 (tariff increase) |
| 3 | May | 200 | $9.20 |
You sell 300 units in June. COGS under each method:
FIFO: 200 units × $8.00 + 100 units × $8.80 = $1,600 + $880 = $2,480
LIFO: 200 units × $9.20 + 100 units × $8.80 = $1,840 + $880 = $2,720
Weighted Average: (200×$8 + 200×$8.80 + 200×$9.20) / 600 = $8.67/unit × 300 = $2,600
Tax impact at 25% rate:
FIFO taxable income is $240 higher than LIFO ($2,720 − $2,480). Tax difference: $240 × 25% = $60 more tax under FIFO on just 300 units.
Scale that to a seller moving 10,000 units/year with a $1.20/unit cost increase across batches, and the annual tax difference reaches $1,500-$3,000+. In years with major tariff changes, the gap widens further.
FBA-Specific Considerations
Amazon physically ships FIFO. The oldest units in the fulfillment center ship to customers first. This means your aged inventory surcharge exposure aligns with FIFO tracking: units approaching the 181-day threshold are the ones Amazon will ship next if demand exists.
Commingled inventory complicates tracking. If you use stickerless commingled inventory, Amazon may ship another seller's physical unit under your listing. This makes batch-level FIFO tracking impractical at the physical level, though you should still track purchase batches for accounting purposes.
FIFO gives better landed cost visibility. When you track costs by purchase batch, you can identify exactly how tariff increases, freight rate changes, or supplier price hikes affect your margins over time. Average cost smooths these signals and can mask erosion until it is too late.
Common FIFO vs LIFO Mistakes
Not tracking purchase batches at all. Many FBA sellers dump all units into a single average cost bucket and never look at batch-level costs. This works until costs change significantly between orders, at which point your COGS calculation becomes inaccurate and your margin reports are unreliable.
Switching methods mid-year. The IRS requires consistency in your cost flow method. Switching from FIFO to LIFO (or vice versa) requires filing Form 970 and may trigger a Section 481(a) adjustment. Work with a CPA experienced in ecommerce before making any change.
Using LIFO without understanding the compliance burden. LIFO requires maintaining detailed inventory layers, tracking LIFO reserves, and following specific IRS regulations. For most FBA sellers under $5M in revenue, the tax savings do not justify the added complexity and accounting costs. FIFO or weighted average is almost always the better choice.
Related Glossary Terms
Direct cost of inventory sold during a period.
Read →Total per-unit cost from factory to FBA warehouse.
Read →Bottom-line profit per unit after all costs.
Read →Revenue minus all variable costs including Amazon fees.
Read →Monthly surcharge on units stored 181+ days in FBA.
Read →Frequently Asked Questions
Does Amazon use FIFO or LIFO for fulfillment?
Amazon uses FIFO for physical fulfillment. The oldest units in the fulfillment center ship to customers first. This is why aged inventory surcharges align with FIFO: your earliest-received units are the ones approaching storage fee thresholds.
Which method should FBA sellers use for taxes?
Most FBA sellers should use FIFO. It matches Amazon's physical flow, provides more accurate inventory valuation on the balance sheet, and is required under IFRS if you sell internationally. Consult your accountant for your specific situation.
Can I switch from LIFO to FIFO?
Yes, but the IRS requires you to file Form 970 and receive approval to change accounting methods. The switch may trigger a Section 481(a) adjustment that spreads the tax impact over multiple years. Work with a CPA experienced in ecommerce before making any change.
How do tariff increases affect FIFO vs LIFO?
When costs rise due to tariffs, FIFO expenses the older, cheaper units first, resulting in lower COGS and higher taxable income. LIFO expenses the newer, more expensive units first, lowering taxable income. The annual tax difference can reach $1,500-3,000+ for mid-size sellers during years with significant tariff changes.