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 LIFO (Last-In First-Out) Repeal

Over the last few years there have been various proposals to repeal and outlaw LIFO accounting in an attempt to raise revenue as part of larger tax reform plans.

LIFO repeal would reverse LIFO reserves, which would be treated as taxable income for the business the year LIFO is repealed. However, companies would not have generated real economic income, resulting in taxation independent of revenue.

If the LIFO accounting method is repealed, it will result in a significant tax increase, both retroactive and prospective, on companies using this accounting method.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 to some policymakers during times of tight budgets and is being treated as a revenue option; the repeal is estimated to generate over $100 billion in 10 years for the U.S. Treasury.

However, neither the merits nor accuracy of the LIFO accounting method have ever been questioned by the U.S. Senate or House of Representatives—repeal is under consideration solely as a revenue generator, not to correct a problem.

NACS does not support any repeal of the LIFO accounting method and is working closely with the Save LIFO coalition to garner support to block repeal. The coalition successfully obtained 113 signatures from members of Congress on a letter to the Ways and Means Committee chairman expressing opposition to repeal last year.

There have been no proposals introduced this year to repeal LIFO; however, the Senate Finance Committee currently has a number of tax working groups including one focused on business taxes that may consider such a proposal before the end of this Congress.



    Lyle Beckwith
    Senior Vice President
    Government Relations
    (703) 518-4220