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1 Kyle Pomerleau, The Tax Treatment of Inventories and the Economic and Budgetary Impact of LIFO Repeal 1 (2016)

handle is hein.taxfoundation/txtinvecbu0001 and id is 1 raw text is: TAXO FOUNDATON FISCAL FACT Feb. 2016 No. 501 The Tax Foundation is a 501(c)(3) non-partisan, non-profit research institution founded in 1937 to educate the public on tax policy. Based in Washington, DC, our economic and policy analysis is guided by the principles of sound tax policy: simplicity, neutrality, transparency, and stability. @2016 Tax Foundation Distributed under Creative Commons CC-BY NC 4.0 Editor, Melodie Bowler Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org The Tax Treatment of Inventories and the Economic and Budgetary Impact of LIFO Repeal By Kyle Pomerleau Economist, Director of Federal Projects Key Findings: * Under current law, businesses are not allowed to deduct inventory costs until the inventory is sold. * There are three general methods by which companies may choose to calculate their inventory costs: First-in, First-out (FIFO); Last-in, First-out (LIFO); and Weighted-Average Cost. Requiring businesses to delay deductions of business expenses, such as inventories, understates the true costs of the expenses, overstates businesses' income, and leads to a higher tax burden. When prices are rising, LIFO moderates this over-taxation by providing faster write-offs than the other methods, closer to true costs. Lawmakers have recently targeted LIFO for repeal, either as a means to raise revenue or as a part of broader tax reform. According to the Tax Foundation's Taxes and Growth Model, the elimination of Last-in, First-out accounting for write-offs of future inventory would reduce GDP by $11.6 billion per year and end up reducing federal revenue by $518 million each year. Unless a special provision were made, LIFO repeal would also retroactively tax a company's LIFO reserve. This additional tax could hit cash-strapped companies particularly hard and could result in 50,300 additional job losses in the short run.

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