Tax reformers must defend LIFO
With our leading role in the 2016 primary election, Iowans are being confronted with a variety of policy issues. We have a unique opportunity to help set the national agenda, especially on the Republican side.
One issue many of us are watching closely is tax reform. Amidst our efforts to nominate and elect candidates committed to a fairer, pro-growth flatter tax system, we must ensure their tax initiatives will benefit—not harm—the small business community. This is where proposals to ban LIFO fail.
LIFO, or “last in, first out,” is an inventory accounting method known by accountants, advisors tax analysts and business owners who anyone who uses it as a vital efficiency and cash flow tool for hundreds of thousands of American companies. It helps businesses both large and small manage the impact of inflation.
The Obama administration has targeted LIFO for elimination. Although the President’s plans his grand schemes for tax reform have fallen short, never came about, the LIFO ban idea has since gained traction, appearing in several tax reform plans floated on Capitol Hill.
Its increasing appeal, even to legislators on the right, is unfortunate and ill considered. LIFO is an accounting method, but a LIFO ban would result in a de facto tax increase on the companies that can least afford it. As such, it should be rejected by every conservative politician.
How can a change in accounting method turn into a tax? Being forced off Moving away from LIFO accounting would require a business owner to revalue the company’s inventory. The effects would reach back through years of completely legal and accurate tax filings. The resulting IRS bills could be so high, giving businesses even up to ten years to pay off the new tax increase could be an insurmountable and unrecoverable burden.
LIFO-ban proponents frequently debate how long to give businesses to pay up.
Although putting companies on a multi-year payment plan could stave off bankruptcy in many cases, such a so-called “solution” misses the point. A LIFO ban is unfairly retroactive. It punishes companies that obeyed the tax laws to the letter. And it will drain them of tens or even hundreds of thousands of dollars that could otherwise be spent on increasing wages, hiring more workers, and or investing in the business.
Right now, we are relying on small businesses to pull us through an economic recovery, create more and better jobs, and provide stability in the face of global uncertainty. When even a small stumble could send this country back into recession, a LIFO ban is too dangerous to contemplate.
Even over the long term, LIFO should be protected because it works well for small businesses. When costs are rising, LIFO more accurately matches the taxed value of inventory to the price it will cost to replace it, when such costs are rising. .
For small companies, especially those ones operating on narrow margins, the ability to use LIFO this can make a huge difference in being able to afford to pay employees, meet other business expenses, and restock increasingly expensive materials all at the same time. Without LIFO, such companies will be more cash-strapped and vulnerable.
Asking small businesses to bear the brunt of the cost of simplifying our tax system is just not right. Tax reform is an absolute necessity for our economic outlook, but it should not tip the market balance against Main Street.
Tax reformers must look to better, fairer solutions to our federal budget and tax problems—ones that will ignite small business growth—not bury it under unexpected tax bills from the IRS. bills.
Before retiring, John Bloom was Global Strategic Sourcing Manager for John Deere Corporation
Managed four teams of Global Commodity Managers who developed and managed sourcing strategies for the Global Agricultural Equipment Division. Strategies covered 25+ factories around the world for these commodities: castings & machined castings, metal fabrication, drivetrains & miscellaneous services (painters, distributiors, etc.)
• Before his retirement, John Bloom, of West Des Moines, was global strategic sourcing manager for Deere & Co.