As the White House and Congress continue their debate about raising the government’s debt ceiling, one of the issues on the table is a repeal of “last-in, first-out” accounting, which would essentially mean a multi-billion dollar tax increase on companies that utilize the accounting method.

Bill Cloppert
Bill Cloppert, CPA

President Obama and other Democratic officials have argued that repealing last-in, first-out (LIFO) accounting would simplify the tax code and raise revenue that will help offset an increase in national debt. Republican officials – as well as organizations such as the National Association of Wholesale-Distributors – have argued that a repeal of LIFO would harm businesses and hurt the economy at a time when jobs already are scarce.

If LIFO is repealed, companies currently utilizing LIFO would have to revalue their inventory based on the first-in, first-out (FIFO) method and pay tax on the difference. The NAW and other outlets estimate that it will cost those companies $72 billion in taxes.

In an e-mail sent this morning to its members, the NAW wrote, “We need everyone interested in protecting LIFO to call the White House – now – to let them know that LIFO repeal would seriously hurt their businesses, not just the rich, and would harm economic recovery and cause job loss. … If we produce only a small number of calls, the White House will assume that LIFO use is not widespread and that it only impacts the oil and gas industry and a few large corporations. We need to tell them that LIFO repeal would harm hundreds of thousands of businesses, mostly small and mid-sized companies.”

Democratic leaders have argued that a LIFO repeal would impact only a limited number of companies, mostly large energy companies. In a press conference Wednesday, President Obama said, “The tax cuts I’m proposing we get rid of are tax breaks for millionaires and billionaires; tax breaks for oil companies and hedge fund managers and corporate jet owners.”

Government officials face a deadline of August 2 to increase the nation’s debt limit or risk being unable to pay its bills. The current limit is $14.3 trillion, and the government reached that limit last month. There is some debate about whether the Aug. 2 deadline can be moved and how high the debt ceiling should be raised, but leaders of both parties have made it a priority to negotiate a deal in the near future.

Barnes Dennig professionals will monitor the situation and keep you abreast of all tax and accounting issues that are impacted by the negotiations.