Friday, August 29, 2014

LIFO/FIFO Who Cares?

LIFO retention and the comprehensive tax reform plan

The answer is you, unless you don't pay US taxes which is much harder then you might thinkWhile this is not strictly supply chain, it will likely affect most if not all distributors in the US. So it might be something you want to watch and be aware of. Sorry, we don't really have a software fix for the US tax system yet, but the best way to deal with them is to be informed so read on

There are two primary inventory accounting methods: LIFO and first-in, first-out (FIFO). Under the LIFO inventory accounting method it is assumed that the last item entered into the inventory is the first item sold. Accordingly, the taxpayer's ending inventory is valued at historical costs rather than the most recent costs.

Currently, taxpayers that use LIFO are required to calculate and track their LIFO reserves, which is the difference between the accounting cost of inventory calculated using the FIFO method and the same inventory using the LIFO method. The LIFO reserve is the deferred taxable income that results from using the most recent inventory costs to calculate the cost of goods sold, rather than the lower cost associated with historic inventory.

House of Representatives Ways and Means Committee Dave Camp (R – Michigan)  has drafted a proposal to repeal the last-in, first-out (LIFO) method of accounting in his proposed United States comprehensive tax reform plan. - Read More Here 

Within Camp's draft plan, the LIFO inventory accounting method would no longer be permitted from 2015. A business would include its LIFO reserve in its taxable income, which would be subject to tax at 25 percent over a four-year period, beginning with 10 percent of this reserve in its 2019 income, 15 percent in 2020, 25 percent in 2021, and the remainder in 2022.

Additionally, because the repeal of the LIFO method and the inclusion of the LIFO reserve in income could have a substantial effect on cash flow for small and family-owned businesses, the provision provides that LIFO reserves of closely held businesses (generally defined as having no more than 100 owners) would be subject to a reduced tax rate of 7 percent.

The Joint Committee on Taxation has estimated the abolition of the LIFO method would increase revenues by 79.1 billion in the ten years to 2023.

However many American industries use the LIFO accounting method as a way to free up capital to hire new employees and keep their companies running on a predictable schedule. A provision in Chairman Camp's tax reform proposal would retroactively punish companies that have legally utilized this method for years to handle their accounting.  LIFO is a widely accepted and utilized inventory accounting method that has been part of the US tax code for more than 70 years.

Many businesses are not likely to have factored into their business plans a tax bill arising from a retroactive change in the tax code.

Where ever you stand on this issue the important piece is to stay informed.

As the changes shake out the good news is we support multiple costing methods in the MDS system but the changes will likely impact you in some way.

For more information on TSH or MDS call The Systems House, Inc. at 1-800- MDS-5556. Or send a message to
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