Tax Reform Sets Sight on LIFO


By Paul Matvey

As we find ourselves in the middle of income tax reporting season, many dealers focus on their Last-In-First Out (LIFO) reserves and the measure of tax benefits that are obtained for the year. From time to time, corporate tax reform has looked at the benefits attributable to the LIFO inventory accounting method as a tax loophole. Recently, on February 22, the U.S. Department of the Treasury released President Obama’s framework for reforming the U.S. business tax system. This initiative once again puts LIFO clearly in the Treasury’s aim.

Treasury Secretary Tim Geithner announced the business tax reform plan, which the Treasury believes would enhance American competitiveness by simplifying the tax code and eliminating dozens of tax loopholes and subsidies. It is the Administration’s view that the U.S. business tax system does too little to encourage job creation and investment in the United States and creates too many opportunities that encourage shifting production and profits overseas. The Joint House and Treasury report describes the current state of the U.S. business tax system and lays out a framework for its reform. This framework would eliminate tax loopholes and subsidies, broaden the income base and cut corporate tax rates and simplify taxes for America’s small businesses. The Treasury proposal contains certain benefits that dealers would welcome, including lowering the corporate tax rate to 28% from its current level of 35% and making tax filing simpler. However, the business tax reform and reduction in tax rates must restore fiscal responsibility and not increase the deficit. Accordingly, the Treasury report specifically mentions LIFO accounting as a loophole.

As you know, under the LIFO method of accounting for inventories, it is assumed that the cost of the items of inventory that are sold is equal to the cost of the items that were most recently purchased or produced. This allows some businesses, including many dealerships, to lower their tax liability. Eliminating LIFO accounting as a component of business tax reform would bring the U.S. in line with international standards and is viewed as a simplification of our tax system.

Little detail is available as to how the termination of LIFO would be implemented. You may recall that prior attempts at tax reform suggested that the reserve would be taken into income over an extended period, most recently up to seven years. The Administration estimates that the tax revenue generated from all industries employing LIFO will be approximately $73 billion in tax years 2014 through 2022.

It is important for all dealers using LIFO to be attentive to the tax reform if and when it progresses through Congress. Schneider Downs Auto Dealer Advisors will keep you apprised of this extremely important tax matter as information becomes available.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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