Issues surround who pays, how taxes are levied, and just how much is fair.

Taxes LIFO inventory method

LIFO (Last In, First Out) is a generally accepted accounting principle permitted in the U.S. tax code since 1939 and used by thousands of companies in a wide range of industries. The LIFO inventory accounting method is based on the assumption that the last goods brought into inventory are the first goods sold. Like many other industries, petroleum refiners, wholesalers and retailers use LIFO to address inflation or rising prices over the course of their operations. In times of rising prices, the LIFO accounting method results in better matching of costs and revenues because cost of goods sold are valued at the current cost of replacing that inventory.

Repeal of LIFO would represent a retroactive recapture of a company's LIFO reserves—the accumulated difference between current costs and historical costs that has resulted from using LIFO over many years. Essentially, the proposal would require recalculating our inventory values and resulting tax liability using FIFO (First In, First Out), and then pay tax on the difference. Under the proposal, companies would have a 10-year amortization period to pay off this liability. This represents a multibillion dollar tax penalty on the petroleum refining industry.

Repealing LIFO would have a major damaging impact on the U.S. economy and job creation. The LIFO inventory method recognizes the reality that inflationary gains should not be taxed until the benefits from those gains are permanently withdrawn from the business. If a business must pay taxes currently on that inflationary income, it would have to either acquire additional capital in order to maintain existing inventory levels, or shrink the level of operations and reduce employment to be able to afford the additional taxes.

Congress should NOT repeal LIFO because it would:
  • Reduce jobs across American industry, hurting workers and families everywhere already struggling with the economic downturn.
  • Result in a significant retroactive tax increase for businesses, creating significant cash constraints and limiting their ability to manage inflation.
  • Require companies to redirect substantial cash or sell assets in order to cover the tax payment, restricting their ability to invest and create jobs.

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