The President’s Budget for FY 2010, 2011, and 2012 proposes repealing the LIFO (Last-In First-Out) accounting method.
LIFO is a textbook accounting method used to determine both book income and tax liability. The term refers to the assumption made by a business in establishing the value of its inventories. LIFO is an abbreviation for “last-in-first-out.” 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.
LIFO 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 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If the LIFO accounting method is repealed, it will result in a significant tax increase both retroactive and prospective on companies using this accounting method.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 Billion 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.
President Obama called for the repeal of LIFO in the budget he submitted to Congress for FY 2012.
NACS is working closely with the Save LIFO coalition to garner support to block this repeal in both the House and Senate.