On Thursday, June 21st, SBE Council Tax Advisor Leonard Steinberg, EA, CMC represented our organization for a Capitol Hill Briefing in Washington on LIFO Repeal. The briefing was conducted for members of the Republican Study Committee (RSC) and their staffs.
Steinberg was one of four panel experts who presented on LIFO's background, its importance to small business and the harsh and costly impact if it is repealed. The others panelists included, Jade West, Sr. Vice President - Government Relations for the National Association of Wholesaler-Distributors (who also leads the LIFO Coalition, of which SBE Council is a member); Holly Lass, Senior Director, Legislative Affairs for the National Beer Wholesalers Association; and Chris Fetzer, Senior Associate at Haake & Associates. U.S. House Reps. Jim Jordan (R-Ohio), RSC Chairman and Geoff Davis (R-KY) also stopped by the briefing to present their views and an update from the Hill.
Each of the panelists presented their perspectives on the impact and implications of the proposed repeal of the LIFO method of inventory valuation. Mr. Steinberg, as a practicing tax accountant, explained how the repeal would adversely affect small businesses. He focused on the negative and costly consequences repeal would have on business and personal income tax returns.
Most small businesses are established as either as an S-Corp, a Partnership, a Limited Liability Company (LLC), a Limited Liability Partnership (LLP), or as a sole proprietorship. Each of these entities is considered pass-through entities for purposes of reporting income and gains and losses on their individual tax returns. For S-Corps, Partnerships, and LLPs, the IRS Form K-1 is generated in the business tax return. LLCs (if a sole ownership) and Sole Proprietors prepare IRS Form Schedule C.
IRS Form K-1 filers and Schedule C filers report their net income with their tax returns. The amount reported can affect the calculation of Adjusted Gross Income. Schedule C filers are also subject to Self-Employment taxes on their net profits from their business.
If LIFO were to be repealed, net income would rise and thus be subject to additional taxation. This additional reported income could also trigger the AMT calculation. The AMT is a flat tax on incomes above certain amounts and has never been indexed for inflation.
Ms. West and Ms. Lass explained that the Administration is looking to tax the LIFO reserves of all companies using this method. The LIFO reserve is the calculated difference between using the FIFO method and the LIFO method. The taxation would be retroactive to the first use of the LIFO method by each company. The proposed taxation would be spread over 10 years.
Ms. West and Mr. Steinberg also explained that if the United States were to adopt the International Financial Reporting Standards (IFRS), the use of LIFO will be prohibited.
All panelists agreed that the repeal of LIFO will be a job killer and will negatively impact the economic growth of the small business community.
SBE Council has signed numerous letters to Congress that have spelled out the costly consequences of repealing LIFO. You can find those letters and additional resources on the SAVE LIFO coalition website. Last week, SBE Council Chief Economist Ray Keating also wrote a short piece on the subject – read “The Demonization of LIFO” by clicking here.
Karen Kerrigan, President & CEO -- Report provided by Leonard Steinberg, Steinberg Enterprises, LLC