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President's Budget Proposal Puts LIFO Inventory Costing Method in Question

Posted 4:59 PM by

As President Obama and Congress struggle to look for ways to improve the national budget and reduce the national debt, the Last-in-First-Out (LIFO) costing method has been brought into question. The president is currently discussing with Congress eliminating the use of LIFO as an acceptable accounting method for determining the cost of goods sold. The president believes that the elimination of LIFO would result in an additional $65 billion to $95 billion of revenue for the federal government over a 10-year span and would simplify an overly complicated tax code. As a recent article in the The New York Times indicates, the effect of this change would be significant.

The biggest impact will most likely be felt by small, locally owned businesses in the manufacturing, wholesaling, retailing, and oil industries. Many businesses in these industries use the LIFO inventory costing method as a way to help offset rising costs for the raw materials that they purchase. 

If the repeal of the LIFO method were to occur under the president’s current proposal, the repeal would be applied retroactively, which could result in significant tax liabilities for business owners. The Treasury Department has stated that the president's proposal "requires that tax be paid on long-deferred gains." They have also stated that the tax liability as a result of the repeal of LIFO could be paid over a 10-year period.

For more information on this issue, visit the Associated Equipment Distributors’ SaveLIFO site.

About the Author
Justin Hayes is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group. Justin works with clients to help ensure accurate financial reporting, keeping an eye on their bottom line, helping them avoid risk and maximize efficiencies. Connect with him on LinkedIn.

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