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Why is Congress Threatening LIFO?

Repeal of LIFO would hurt a multitude of businesses in this country. From Main Street to Wall Street and the vast industries in between, LIFO is a trusted resource for keeping an accurate and manageable budget. Congress is threatening to repeal LIFO, which would significantly hinder the competitiveness of U.S. businesses in the worldwide marketplace by placing a significant tax liability on those companies that use it.

The majority of the businesses using the LIFO inventory method are organized in the form of pass-through entities, such as partnerships or S corporations. The real owners of these entities are taxed at individual tax rates. Any reduction in corporate income tax rates that might accompany a repeal of LIFO and other tax expenditures employed by both non-corporate and corporate taxpayers would not provide any offsetting relief for pass-through entities. Should this option be pursued, the consequences for the American business community would be more devastating than any other alternative proposed.

The “new revenue” that is touted by supporters of LIFO repeal comes in the way of retroactive taxes. Businesses who used LIFO would have to pay retroactive income taxes on deferments they took while using LIFO in the past. Unlike ANY other tax expenditures that have been discussed for elimination, repealing this accounting method is the only proposal that would require a business owner to pay taxes retroactively.

Any other proposed tax rate reductions would not compensate LIFO companies for the damaging effects to their bottom line capital base. Taking LIFO reserves and turning them into taxable income, even spaced out over time, would wreak havoc on American businesses using this method of accounting.

The effect of the repeal of the LIFO method on American employers would be devastating.

Why Does LIFO Matter to My Business?

If Congress were to repeal LIFO, not only would businesses across the country face retroactive taxes, they would also be left without a method to plan for fluctuations in inventory costs. LIFO provides a safeguard for businesses that are subject to frequent changes in the price of goods. If LIFO were to be repealed, businesses would lose a time-tested  tool used to bring products to the marketplace.

Additionally, if American businesses were no longer able to use LIFO, their foreign competitors would gain a competitive edge. At present, only U.S.-based companies are permitted to use LIFO and if it were repealed their taxes would increase significantly, whereas their foreign competitors would  not have to account for an additional financial burden.

The impact of LIFO repeal would be felt far and wide. From small, family-owned businesses to large corporations, and all entities in between, LIFO is crucial to the competitiveness of U.S. enterprise and must be preserved.

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