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LIFO Accounting Method’s Future Questionable

DSC_1126 Last-in, first-out accounting, or LIFO, is favored by many companies for the tax relief it provides. However, the folks in Washington, D.C. are talking again about doing away with LIFO accounting for business – and that could cost companies across the nation billions in new tax liabilities.

Efforts to repeal LIFO have been in place over the last five years because it would raise a significant amount of revenue. This year, as the debt level continues to increase and discussions on tax reform take place, LIFO is at serious risk of being repealed. Repealing the LIFO accounting method will result in a significant tax increase both retroactive and prospective on companies using this accounting method.

In a recent article in Crain’s Cleveland Business, Cleveland area distributor, Applied Industrial Technologies Inc., stated that they have tens of millions of dollars riding on the issue of eliminating the last-in, first-out method of accounting.

Mark Eisele, Applied Industrial's VP and CFO, said the recent proposal to eliminate LIFO and require companies to pay taxes for its use to date would be expensive. It would mean his company's tax liability could rise by more than $50 million based on current inventory levels — and as much as $60 million if those levels climb to where they were a few years ago. The company would have 10 years to pay, but that is little comfort in this tough economy.

The National Association of Manufacturers (NAM) has estimated the repeal of LIFO to equal $52 billion in new taxes on corporations over the next ten years alone and substantially more beyond that. The White House’s own estimates are even higher, figuring that ending LIFO in 2012, which the White House considers a loophole in the code, would raise $72 billion by 2016, to the nonpartisan Congressional Budget Office. The accounting method assumes that the less expensive inventory remains on hand for calculating taxable income.

Leonard Steinberg, a tax advisor for the Small Business and Entrepreneurship Council, a Washington-based advocacy group opposed to move, says in an article for the Wall Street Journal blog, In Charge, that it would impact small firms in any sector that make continuous inventory purchases: “Carrying inventory would become more expensive. How do you not pass that along to your customers?”

Over 120 trade associations support the NAW and NSBA in opposing the repeal of the LIFO including, AHTD, ISA, ISD, NAHAD, and PTDA, joining forces in the LIFO Coalition. However, with the President of the United States, the Chairman of the Ways and Means Committee, the Securities and Exchange Commission, the Financial Standards Accounting Board, and the Joint Committee on Taxation all weighing in recently against LIFO in one form or another, the possibility that it will repealed is increasing.

“Most of our customers utilize the weighted cost average for their accounting method,” states Susie Hopper, VP of Tribute’s TrulinX Division. “However, if a distributor is using LIFO, now would be a good time to reevaluate their accounting strategy and start making contingency plans.”

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Tribute, Inc. is a provider of ERP business management software for distributors and system integrators in the fluid power, hose, motion control, automation, fluid handling & pump industry who provide value-added services.