Now is the time to switch to LIFO accounting

LIFO repeal was first considered in the Senate two years ago when then-Majority Leader Bill Frist (R-TN) proposed repeal to raise new tax revenue to offset, or “pay for,” a one-time tax rebate of $100 to some taxpayers in response to the very high gas prices at the time.

Although the Senate Finance Committee held hearings on the issue in 2006, no action was taken on the legislation. However, the threat to LIFO was raised again last year when House Ways and Means Committee Chairman Charlie Rangel (D-NY) included full repeal as one of the “offsets” – tax increases – in his “mother-of-all-tax-reforms” which he introduced last October. No action was taken on the “mother” bill last year, nor is action expected in 2008.

This year, however, threat to the use of LIFO is coming from the regulatory rather than legislative front. Both the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) are moving to eliminate use of LIFO as part of the process of “convergence” – making US financial accounting standards consistent with the International Financial Reporting Standards (IFRS).

The NAW-led LIFO Coalition has changed its focus from Capitol Hill to the regulatory agencies to respond to this new threat. NAW met earlier this year with the Deputy Chief Accountant at the SEC to make argument that eliminating the use of LIFO as part of the accounting standards convergence would have dramatic tax consequences for American businesses because of the requirement that LIFO be used for both “book and tax.”

Following up on the SEC meeting, a small group of LIFO Coalition leaders will be meeting in late June with the Assistant Secretary of Treasury for Tax Policy, and we plan to follow that meeting with a meeting on the issue with Treasury Secretary Paulson.

While the convergence process is moving forward unabated, it seems that the effort of the Coalition and others to raise the tax issue with the regulators has had an impact, as there is now discussion of making it optional rather than mandatory for publicly-traded US companies to use the international standards in filing their financial reports

Why CPAs should consider LIFO now for their clients

Joseph E. Stiglitz, winner of the 2001 Nobel Prize in Economics, recently wrote, “Inflation also presents special problems in terms of accounting, and those who understand those problems can reduce their tax liabilities significantly. Today, most businesses use last-in-first-out, or LIFO, accounting, which subtracts the cost of the latest widget you put in inventory from the cost of the last widget you sold in order to calculate gross profit. Some companies, however, still use first-in-first-out, or FIFO, accounting, which subtracts the cost of the oldest widget in your inventory from the cost of the last widget you sold. In a period of rapid inflation, when the price of widgets is probably on the rise, FIFO companies will appear to be selling their widgets at much higher profit margins than LIFO companies, and their tax liability will be higher as a result. So if you haven’t yet made the switch to LIFO accounting, now is the time to do so.”

One word: Inflation. Inflation has a material impact on business. If the items being stocked at the front of the shelf cost more than the items at the back of the shelf and these are the items that are sold, cost of goods sold will be higher and ending inventory lower. Higher cost of goods sold means higher current period expense and less tax. What better way to mitigate the precarious profit siphoning aspect of inflation?

Inflation is making its grand entrance into the boardrooms of many businesses in the country, but LIFO can help mitigate the negative impact of inflation. The LIFO accounting method is the best defense against inflation. And, whether already on LIFO or not, the IPIC method makes LIFO even more advantageous for today’s companies.

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About SourceCorp Professional Services
Celebrating their 25th year in business, SourceCorp Professional Services is the leading provider of LIFO Accounting, R&D Tax Credit Studies, Cost Segregation Studies, and Green Building Tax Deduction/Certification in North America. With a specialized team of nearly 70 professionals and with offices located throughout the country, accounting firms realize unparalleled experience, services, and trust. SourceCorp serves many of the nation’s most prominent CPA firms, Associations, and Fortune 1000 companies.

Resource: NAW News