Elimination of the LIFO Method?

One of the biggest revenue-raisers proposed by President Obama, as talks continue regarding the nation’s debt ceiling, is what he describes as an arcane change in the tax treatment of business inventories — things like steel, groceries and oil. The elimination of this method would dramatically affect the manufacturing and distribution industries.

The proposal would prohibit the use of an accounting technique known as last in, first out, or LIFO. The technique is used to determine the cost of goods sold, and therefore the income earned, by a company. 

The repeal of LIFO would have a tremendous impact on closely held businesses using LIFO. The LIFO reserve would be brought back into income and taxed accordingly. Many closely held businesses have significant LIFO reserves that have built-up over time and the taxation of these reserves will result in a major tax hit to the company. In some cases, the tax effect may be significant enough to force a company out of business given the current economic challenges that exist. We will continue to monitor the developments relating to LIFO and assist our clients as necessary.