LIFO TALKING POINTS
WHAT IS LIFO?
 Businesses with inventory may determine the value of their inventory using a
number of acceptable accounting methods. One such method is the LIFO (last
in/first out) method.
 Companies that use LIFO assume for accounting purposes that they sell first
the inventory most recently acquired or manufactured. Industries that often
experience rising inventory costs typically account for inventory using the
LIFO method. This is because LIFO accounting allows them to match current
sales income with the current higher cost of that inventory. In short, the LIFO
method enables businesses to avoid phantom profits caused by inflation.
 The LIFO accounting method has been expressly permitted by the Internal
Revenue Code since the 1930’s.
 LIFO is used by a wide range of businesses including publicly-traded and
privately-held companies, manufacturers, extractive industries, wholesalers,
retailers, automobile and equipment dealers and numerous others. Many of
these companies have been on LIFO for decades.
 By contrast to LIFO, another acceptable method for inventory accounting is
the FIFO (first in/first out) method. Businesses that account for inventory
using the FIFO method assume that they first sell inventory which they have
held the longest. The FIFO method is preferred by companies that sell in a flat
or declining price market.
THE PROPOSAL
 The Administration’s F/Y 2011 budget proposal includes a provision that
repeals the use of LIFO inventory accounting and requires affected taxpayers
to restate their LIFO inventory at its FIFO value.
 The Joint Committee on Taxation estimates that LIFO repeal would raise $75.3
billion, virtually all of which would be raised in the first year after enactment.
However, the budget proposal permits this one-time increase in income to be
taken into account ratably over ten years.
 The LIFO debate first arose in 2006 when LIFO repeal was proposed for oil
companies to pay for a gas tax rebate. The perception was that oil companies
used LIFO to mitigate the impact of inflation on inventory. Congress quickly
U.S. Chamber of Commerce, 1615 H Street NW, Washington DC 20062
Visit the U.S. Chamber’s Economic Policy Division online at
www.uschamber.com/issues/economy/economic-tax-policy or contact Caroline Harris, Chief Tax Counsel
([email protected]) or Anne Warhola, Senior Tax Counsel ([email protected]).
learned that LIFO is also used by other industries and by large and small
businesses alike. Eventually, the proposal died, but the idea of targeting LIFO
came back in 2007 in (then-Ways and Means Chairman) Rangel’s
comprehensive tax reform bill, which included a provision repealing LIFO
accounting for all businesses. More recently, it was included in the Obama
fiscal year 2011 budget. And LIFO repeal for integrated oil companies was
included in the Wyden-Gregg tax reform bill that was introduced earlier this
year. In spite of this apparent interest in LIFO repeal and the high revenue
estimate associated with it, Congress has not looked to LIFO repeal as a pay
for in legislation that is moving during the current legislative session.
THE US CHAMBER OPPOSES LIFO REPEAL BECAUSE:
 Repeal of LIFO accounting would result in a punitive, retroactive tax increase
for businesses, placing significant cash constraints on them and limiting their
ability to manage inflation. This is because companies using the LIFO
inventory accounting method would have to write up the value of their
inventories to the FIFO value. As a result, these companies would have to
record illusory profits on their books, when no economic activity has occurred
that would justify recording any profits.
 Companies would have to capture taxes on inventory for as long as they have
used LIFO, which could be decades. Depending on how long a company has
elected to use LIFO, the LIFO reserve could exceed a company’s net worth.
 During the current economic climate, many companies lack the capital
resources or the ability to obtain the debt financing needed to pay the taxes
resulting from the repeal of LIFO. The proposal could result in the forced
downsizing or liquidation of many companies in order to raise the capital
necessary to pay the retroactive tax hit, even if companies are allowed to pay
the tax over a ten-year period.
 LIFO is not a tax loophole, and repeal of LIFO lacks any policy justification.
No tax abuse problem has been identified to support repealing the LIFO rules,
nor has any other valid policy reason been offered.
U.S. Chamber of Commerce, 1615 H Street NW, Washington DC 20062
Visit the U.S. Chamber’s Economic Policy Division online at
www.uschamber.com/issues/economy/economic-tax-policy or contact Caroline Harris, Chief Tax Counsel
([email protected]) or Anne Warhola, Senior Tax Counsel ([email protected]).