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.


 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  Many expected a reprise of a version in a different bill from 2005, which would have repealed it just for the oil companies.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.


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. 




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