PDF Buried in the 2012 Budget Proposal from the Obama Administration once again was the repeal of the LIFO inventory method of accounting. This has been the case of all budgets submitted by the Obama Administration.
Will It Happen
I get asked by clients if I think it will make it into the congressional budget and actually pass. I didn’t think it would happen in the past two years due to the strong lobbying efforts from NADA, the Pharmaceutical industry, Big Oil and a few other interested parties. But the landscape is changing for many of the big industries, and the political battles that will be fought will only be the ones that have the largest return on investment.
Just Yesterday
While oil companies are making record profits, they constantly are coming under scrutiny for all the tax incentives and “loopholes they exploit”. Just yesterday S.940 “Close Big Oil Tax Loopholes Act” failed to pass a procedural vote. This is a win for the Oil companies. My point is that LIFO may not be the big issue that non-dealership industries want to help carry the torch on in the next couple of months.
Less Dealers are Using LIFO
In 2009 and 2010 many dealers elected off of LIFO and spread the income effect over a 4 year period. This was necessary for many due to the lack of cash flow and sustained taxable income due to the erosion of LIFO layers. Remember that many of the publicly traded dealer groups generally do not use LIFO because they want their earnings per share to be as high as possible for shareholders. So realistically, when you look at NADA’s membership and dealer special interest groups as a whole, I suspect that the percentage of dealers that use LIFO is substantially less than it was in 2007 and 2008.
Income Effect of LIFO Termination
Based on the escalating projected savings in the 2012 proposed budget, it seems that the administration anticipated there will be a phase out of the LIFO income deferral and not just have it taken in 1 year. I suspect that it likely would be at least 4 years but could be more considering the substantial impact to some businesses.
So once again, there is no crystal ball regarding LIFO Repeal, but I think there has never been a more opportune time for an administration to try and get repeal pushed through congress.
If you have any questions, please feel free to contact us at any of our four locations.
John E. Donaldson, CPA
Potter & Company, P.A.
www.gotopotter.com/dealerships
704-926-3300