STATUS
In
his Fiscal Year 2012 proposed budget President Obama recommended that Congress repeal the Last In-First Out
(LIFO) inventory accounting method.
The Administration has offered it as a way to raise tax
revenues to reduce the deficit. The context for the
suggestion was the on-going talks between the President and
Republicans regarding the raising of the debt ceiling so the
government can continue to borrow. The Republicans have made
it clear their price for agreeing to a debt ceiling increase
is that there has to be meaningful deficit reduction
accompanying it. They want the deficit reduction efforts to
be in the form of spending cuts only; the President has said
he wants tax revenue increases. There is no formal proposal
on the table and the tax items that the Administration has
alluded to are seemingly random in nature. They range from
oil and gas industry tax credits and deductions to increased
taxes on millionaires and billionaires. It is not clear how
LIFO repeal even got on the “list.” But it is.
There has been no legislative activity.
ANALYSIS
In the 109th Congress, then Senate Majority
Leader Bill Frist (R-TN) unveiled a package of gas tax
relief items including a $100 gas tax rebate for consumers
and authorization for drilling in the Arctic National
Wildlife Reserve (ANWR). To pay for the lost tax revenues
from the rebate, the proposal included a repeal of the Last
In-First Out (LIFO) inventory accounting method. He quickly
withdrew the proposal in the face of significant opposition.
The LIFO method assumes the items of inventory you
purchased or produced last are the first items you sold,
consumed, or otherwise disposed of. Items included in
closing inventory are considered to be from the opening
inventory in the order of acquisition and from those
acquired during the tax year.
To the surprise of many, Senator Frist’s proposal was a
simple but complete repeal of the LIFO method for all. Many
expected a reprise of a version in a different bill from
2005, which would have repealed it just for the oil
companies. The LIFO inventory accounting method has been a
common method for many years and it is particularly useful
in inflationary times. There are other methods of inventory
accounting such as First In-First Out. Each method produces
different income results, depending on the pricing trends at
the time. In times of inflation, when prices are rising,
LIFO will produce a larger cost of goods sold and a lower
closing inventory. Under FIFO, the cost of goods sold will
be lower and the closing inventory will be higher. However,
in times of falling prices, the opposite will hold true.
Typically, a business carries a LIFO reserve on its books
that reflects the amount of taxable income that has been
"deferred" by using the method. This amount reflects
the difference between what the dollar value of the
inventory would have been under FIFO and the LIFO value.
If the LIFO method is repealed, the LIFO reserve is
eliminated and the taxable income is increased immediately
but the taxes due usually can be paid over a four year period under change
of accounting rules. Discussions about LIFO repeal
usually include some discussion of a longer transition rule
to stretch out the period in which the business has to pay
the accrued tax liability.
OUTLOOK
The theory is that the debt ceiling has to be increased by
early August but lately, Republicans have challenged whether
that is in fact the absolute deadline. So we might know the
answer about LIFO repeal before the August recess or we
might not.
/I39100711
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