Revenues
Repeal the “LIFO” and “Lower of Cost or Market” Inventory Accounting Methods
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
| Billions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2015-2019 | 2015-2024 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in Revenues | 13 | 26 | 26 | 26 | 14 | 2 | 2 | 2 | 2 | 2 | 104 | 115 |
Source: Staff of the Joint Committee on Taxation.
Note: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections.
To compute its taxable income, a business must first deduct from its receipts the cost of purchasing or producing the goods it sold during the year. Determining those costs requires that the business identify and attach a value to its inventory. The tax code allows firms to choose from among several approaches for identifying and determining the value of the goods included in their inventory. For itemizing and valuing goods in stock, firms can use the “specific identification” method which requires a very detailed physical accounting of items in inventory. An alternative approach—“last in, first out” (LIFO)—also allows firms to value their inventory at cost but permits them to assume that the last goods added to inventory were the first ones sold. Yet another alternative approach—“first in, first out” (FIFO)—is based on the assumption that the first goods sold from a business’s inventory reflect the cost of the goods that have been in that inventory the longest. Firms that use the FIFO approach have two alternative methods for assessing the value of goods—the “lower of cost or market” (LCM) method allows them to assess inventory on the basis of its market value and use that valuation if it is lower than the cost. In addition, businesses that use the FIFO approach can qualify for the “subnormal-goods” method of inventory valuation if their goods cannot be sold at market prices because they are damaged or flawed.
This option would eliminate the LIFO method of identifying inventory, as well as the LCM and subnormal-goods methods of inventory valuation. Businesses would be required to use the specific-identification or FIFO methods to account for goods in their inventory and to set the value of that inventory on the basis of cost.