U.S. Chamber of Commerce, 1615 H Street NW, Washington DC 20062Visit 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(charris@uschamber.com) or Anne Warhola, Senior Tax Counsel (awarhola@uschamber.com).

LIFO TALKING POINTS

WHAT IS LIFO?

Businesses with inventory may determine the value of their inventory using anumber of acceptable accounting methods. One such method is the LIFO (lastin/first out) method.

Companies that use LIFO assume for accounting purposes that they sell firstthe inventory most recently acquired or manufactured. Industries that oftenexperience rising inventory costs typically account for inventory using theLIFO method. This is because LIFO accounting allows them to match currentsales income with the current higher cost of that inventory. In short, the LIFOmethod enables businesses to avoid phantom profits caused by inflation.

The LIFO accounting method has been expressly permitted by the InternalRevenue Code since the 1930’s.

LIFO is used by a wide range of businesses including publicly-traded andprivately-held companies, manufacturers, extractive industries, wholesalers,retailers, automobile and equipment dealers and numerous others. Many ofthese companies have been on LIFO for decades.

By contrast to LIFO, another acceptable method for inventory accounting isthe FIFO (first in/first out) method. Businesses that account for inventoryusing the FIFO method assume that they first sell inventory which they haveheld the longest. The FIFO method is preferred by companies that sell in a flator declining price market.

THE PROPOSAL

The Administration’s F/Y 2011 budget proposal includes a provision thatrepeals the use of LIFO inventory accounting and requires affected taxpayersto restate their LIFO inventory at its FIFO value.

The Joint Committee on Taxation estimates that LIFO repeal would raise $75.3billion, 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 betaken into account ratably over ten years.

The LIFO debate first arose in 2006 when LIFO repeal was proposed for oilcompanies to pay for a gas tax rebate. The perception was that oil companiesused LIFO to mitigate the impact of inflation on inventory. Congress quickly

U.S. Chamber of Commerce, 1615 H Street NW, Washington DC 20062Visit 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(charris@uschamber.com) or Anne Warhola, Senior Tax Counsel (awarhola@uschamber.com).

learned that LIFO is also used by other industries and by large and smallbusinesses alike. Eventually, the proposal died, but the idea of targeting LIFOcame back in 2007 in (then-Ways and Means Chairman) Rangel’scomprehensive tax reform bill, which included a provision repealing LIFOaccounting for all businesses. More recently, it was included in the Obamafiscal year 2011 budget. And LIFO repeal for integrated oil companies wasincluded in the Wyden-Gregg tax reform bill that was introduced earlier thisyear. In spite of this apparent interest in LIFO repeal and the high revenueestimate associated with it, Congress has not looked to LIFO repeal as a payfor 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 increasefor businesses, placing significant cash constraints on them and limiting theirability to manage inflation. This is because companies using the LIFOinventory accounting method would have to write up the value of theirinventories to the FIFO value. As a result, these companies would have torecord illusory profits on their books, when no economic activity has occurredthat would justify recording any profits.

Companies would have to capture taxes on inventory for as long as they haveused LIFO, which could be decades. Depending on how long a company haselected to use LIFO, the LIFO reserve could exceed a company’s net worth.

During the current economic climate, many companies lack the capitalresources or the ability to obtain the debt financing needed to pay the taxesresulting from the repeal of LIFO. The proposal could result in the forceddownsizing or liquidation of many companies in order to raise the capitalnecessary to pay the retroactive tax hit, even if companies are allowed to paythe 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.