While this particular bill has little chance to pass in an election year, it’s noteworthy because repealing LIFO was proposed separately by both political parties. So the risk of elimination exists regardless of which party gains power during the next election cycle.

Help stop the elimination of LIFO
Although, the bill won’t be considered until the second session of the 110th Congress in 2008, industries are strongly urging Congress to reject any effort to repeal LIFO. On behalf of dealerships, the National Automobile Dealers Association (NADA) is fighting to maintain the use of LIFO. You can help protect LIFO by sending a message to Capital Hill.

Negative impact on dealerships
Repealing LIFO would bring substantial tax increases by requiring companies currently using the accounting method to report their LIFO reserves as income. It is assumed any elimination of LIFO would include a phase-out period that would ease the cash flow impact on a dealership. The most recent bill included a 10-year phase-out for LIFO, although the mechanics of the phase-out were not available.

Why is LIFO under attack again?
The assault on LIFO is fueled by two unrelated factors: the oil and gas industry and international accounting standards.

Oil and gas industry
The oil and gas industry is the largest beneficiary of LIFO. With record oil company profits and rising fuel prices, removing a perceived tax break for this industry will be viewed positively by the public.

International accounting standards
For years, there’s been a push for conformity between international financial accounting standards (IFRS) and U.S. generally accepted accounting principles (GAAP). And LIFO is not allowed under international accounting standards.

If the U.S. principles are changed to agree with international standards on LIFO, American companies would have to stop using LIFO in order to comply with GAAP. An existing requirement in the tax code requires all taxpayers using LIFO for tax purposes also use LIFO for financial statement purposes. This conformity requirement would force all companies changing from LIFO for financial statement purposes to terminate their LIFO election for tax purposes.

If this occurred, LIFO would be effectively eliminated without any action by Congress for any company issuing GAAP-based financial statements. Congress, however, would like this "revenue raiser" to be included in legislation to help keep any spending or tax bill "revenue neutral." So Congress will likely act in advance of any conformity initiative by the Financial Accounting Standards Board (FASB).

The issue could be solved if Congress eliminates the LIFO conformity requirement in the tax code, which would allow companies to remain on LIFO regardless of any action by FASB. But there appears to be little appetite for this in Congress. In the past, intense lobbying from affected industries, including NADA, prevented Congress from acting, but the tide is clearly turning.