In early 2014, the House Ways and Means Committee proposed repealing the use of LIFO (Last-In First-Out) accounting method. Likewise, President Obama's budget proposals for the past few fiscal years, as well as versions of Senate Democrat budgets, have included the same proposal. Some of these proposals have included a retroactive tax payment on what is known as the “LIFO reserve.”
LIFO is a textbook accounting method used to determine both book income and tax liability. The term "last-in-first-out" refers to the assumption made by a business in establishing the value of its inventories. This is opposed to the other common inventory accounting convention that is FIFO for "first-in-first-out"
LIFO came into the tax law in 1939 and is considered a more accurate accounting method when inventory costs are rising or during a time of inflation, by taking into account the greater costs of replacing inventory.
LIFO repeal would reverse LIFO reserves so that the amount of the reserve would become income for the year in which the repeal was effective. However, companies would have no economic income from such an accounting adjustment, meaning taxation without receipt of dollars.
If the LIFO accounting method is repealed, it will result in a significant tax increase, both retroactive and prospective, on companies using this accounting method. In rapidly escalating markets, the use of LIFO accounting has the effect of minimizing tax liability, premised on the cost of goods acquired in earlier periods that are disconnected from replacement costs. As gasoline prices skyrocketed in 2008, this proved to be a benefit to companies struggling to obtain revenues adequate to cover replacement costs by avoiding tax liability. Depending on the size of the LIFO reserve relative to its retained earnings, LIFO repeal could be devastating for a given taxpayer. For small businesses, the LIFO reserve could exceed retained earnings, in which case the business probably would liquidate, and might still owe tax.
Repealing LIFO is enticing during these times of tight budgets and is being treated as a revenue option; the repeal is estimated to generate over $100 bBillion in 10 years for the U.S. Treasury. However, it must be noted that neither the merits nor accuracy of the LIFO accounting method have ever come into question by United States Senate or the House of Representatives.
NACS is opposed to any repeal of the LIFO accounting method and is working closely with the Save LIFO coalition to garner support to block this repeal in both the House and Senate. The coalition successfully obtained 113 Member signatures on a letter to the Ways and Means Committee Chairman expressing opposition to repeal.
House Ways and Means Committee Chairman Dave Camp included LIFO repeal in his tax reform proposal. No additional action occurred.