Obama’s Budget Proposal Includes LIFO Repeal
There’s a single line item that says “Repeal LIFO” in President Barack Obama’s proposed budget for 2010. He projects this change would result in $61 billion in revenue to go toward the federal deficit between 2010 and 2019.
If passed, this would mean huge tax increases for dealerships and companies across many industries; however, it is unknown if this attempt to repeal the last in, first out (LIFO) inventory method is any more realistic than proposals from past presidential administrations.
Dave Wiggins, a dealership principal with LarsonAllen, suggests that dealers conduct business as usual. He also recommends contacting your federal representatives to let them know how this decision would affect your business and the local economies. “Once the true impact of repealing LIFO is calculated, it’s likely the repeal won’t pass,” says Wiggins.
How LIFO works and why eliminating it would be bad
“The LIFO method of valuing inventory has been a long-time friend to dealers,” says John Donaldson, a LarsonAllen senior accountant specializing in dealerships. As prices and inventories rise, this method creates expense for dealerships by increasing the cost of goods sold on their income statements and decreasing the value of inventory on their balance sheets.
“Although some dealers have mixed feelings about the tax and financial benefits of LIFO, the fact remains that it essentially provides dealers with an extended interest free loan from the government,” explains Donaldson.
The idea of repealing LIFO became a popular idea again when big oil companies hiked up gas prices last year. The oil and gas companies are the largest beneficiaries of LIFO, so removing a perceived tax break for this industry may be viewed positively by the public.
“If the repeal does pass, it will be one more blow to dealerships in the midst of the toughest automotive market in the last century,” states Wiggins. But, he thinks if LIFO is repealed, and dealers have to recapture this taxable income, there are still many opportunities for them to improve their tax efficiencies.
So, what should a dealer do today? Wiggins says, “If you are already on LIFO stay on it, unless your current income tax position makes the tax benefits non-existent. And, if you’re not, it’s an accounting method still worth considering.”
Potential options for LIFO repeal
Obama’s budget did not provide guidance or a plan for how the LIFO repeal would be handled. Based on past attempts to eliminate it, Wiggins thinks the following scenarios could be options:
- The current LIFO reserve (income to be recognized) could be spread over a period as long as eight years
- The income could be recaptured and taxed at a rate different than ordinary tax rates
- The existing reserves could be left frozen and the LIFO method could be eliminated for future tax years
How we’re supporting the industry by opposing this proposal
On behalf of dealerships, LarsonAllen is involved with a LIFO coalition through our membership with Auto Team America. The goals are to:
- Preserve LIFO
- Make sure the true economic effects of repeal are considered
- Present the most tax-friendly repeal options
This group is reviewing alternatives and plans to present options to the current administration. To become law, the proposal would have to go through the congressional budgeting process where the full force of politics and policy will rewrite the budget and vote on it.
LarsonAllen will continue to monitor this issue. If you are struggling to make sense of the chaos in the industry, we can offer clarity and advice on your unique business situation and how to protect the long-term profitability of your dealership. For more information, contact us and one of our dealership principals will assist you.
Another noteworthy proposal in the budget
Learn about the large proposed tax increases for higher income individuals
or view Obama’s entire budget proposal, A New Era of Responsibility