David Kirkpatrick

February 5, 2010

White House looking to end LIFO

Ending last-in/first-out accounting would be a very, very bad idea and would punch businesses — particularly small businesses — in the gut at a time when a drastic tax hit is something no business needs. The economy is still rough sledding all around and unemployment isn’t abating. The Obama administration has been making good noises about helping Main Street. Ending LIFO would do anything but.

From the link:

House Ways and Means members crossed party lines in Feb. 3 budget hearings to criticize the Obama administration’s proposal to raise an additional $59 billion in tax revenues by eliminating firms’ ability to use the last-in, first-out accounting method.

“If we do this, if we end it, what’s going to happen is U.S. small businesses are going to take a big tax hit and their competitors overseas are going to have a terrific advantage over us in the marketplace,” Rep. Mike Thompson (D-Calif.) told Treasury Secretary Timothy Geithner. “There’re some industries that have to hold their inventory for a long time; this is a fair and reasonable way to recognize that and I would strongly urge you to go back and revisit that.”

The practice can reduce a business’s tax liability, particularly in times of rising inflation, because it takes into account the higher costs of replacing inventories. The LIFO method is especially important to companies that maintain large inventories over a period of years, such as wineries and distilleries that need to age their inventories. As a result, shifting to a first-in, first-out accounting practice would have the effect of giving those producers income on which they would have to pay taxes, even though the products they have put into inventory may not be available for sale for several years.