For over 70 years, US taxpayers have been able to value the cost of their inventories using the last-in, frst-out inventory method of accounting (LIFO). In general, to use LIFO for federal income tax purposes, taxpayers must also use LIFO for fnancial reporting purposes (herein referred to as the LIFO conformity requirement). The use of LIFO for fnancial reporting purposes is not permitted under International Financial Reporting Standards as promulgated by the International Accounting Standards Board (IFRS). As a result, a conversion from US generally accepted accounting principles (GAAP) to IFRS likely will eliminate a taxpayer’s ability to use LIFO for federal income tax purposes. Moreover, the fact that LIFO is not permissible under IFRS has led many policymakers to debate whether LIFO should be permitted for tax purposes, irrespective of IFRS conversion. As a result, Congress and the Obama Administration are considering a repeal of LIFO, while taxpayers and practitioners are defending the merits of LIFO as sound tax policy and are seeking an administrative exception to the LIFO conformity requirement. The transition from LIFO to an alternate inventory method will have a direct impact on many companies’ cash taxes. This article explores the uncertain future of LIFO, examines a potential exception to the LIFO conformity requirement that could allow the use of LIFO for qualifying companies even after their conversion to IFRS, and discusses planning opportunities that may be available to US taxpayers to help them alleviate the tax burden caused by a LIFO termination.
LIFO is an inventory accounting method used by companies to determine both book income an tax liability. In tax code use since 1979, LIFO is considered a more accurate accounting method when inventory costs are rising because it takes into account the greater costs of replacing inventory. In his administration’s Fiscal Year (FY) 2014 Budget, President Obama has proposed repealing the LIFO method as a revenue offset for federal spending and deficit reduction. The Obama Administration previously has proposed repeal of LIFO as part of debt limit, deficit reduction, and tax reform negotiations. Any repeal of LIFO would dramatically impact organizations and their industries. LIFO is used by manufacturers, distributors, wholesalers, and retailers of all sizes. It is used particularly by small businesses because of thin capitalization and those sensitive to rising supply and materials costs. Under LIFO, as opposed to FIFO, businesses with increasing inventory costs would have a lower tax liability in a given year; however, if prices fall, the taxpayer would have to repay the LIFO benefit through greater tax liability in the following year. Repeal of LIFO would be a burdensome, unnecessary change in fundamental accounting for such businesses and would result in a massive tax increase on those businesses. As policymakers debate fiscal issues, including deficit reduction efforts, some have called for a retroactive repeal of the “last-in, first-out” – or “LIFO”— inventory accounting method for the oil and gas industry. AFPM strongly opposes singling out the oil and gas industry for repealing this generally accepted accounting method. AFPM also encourages policy makers to consider the impacts on domestic manufacturing jobs from the repeal of LIFO when judging the trade-offs between base-broadeners and rate reduction in comprehensive tax reform.
LIFO is the tax-friendly “last in, first out” method of accounting for inventory that has become increasingly touchy in recent years. It keeps lower-priced inventory on the books and expenses more recently purchased, usually higher-priced inventory, which suppresses the immediate tax liability.
The proposed budget offers no discussion of a plan to repeal LIFO except to include it as a line item among planned federal receipts. The table suggests a LIFO repeal would have no impact on...
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