March 20, 2023

New Bill In U.S. House Would Repeal LIFO For Oil And Gas Companies

After President Joe Biden submitted a budget calling for $4.5 trillion in new taxes on large and small businesses and high-income earners, last week lawmakers in the U.S. House of Representatives released legislation to repeal roughly a dozen tax credits and deductions utilized by the oil and gas industry.

One of the proposals would repeal the last-in, first out (LIFO) deduction for large oil and gas companies. While this legislation would not directly impact industrial metals industry companies that utilize LIFO and has little chance of passing Congress, MSCI takes seriously any threat to the LIFO inventory accounting method.

Ending the provision for one industry could lead to future threats to other industries. As such, we will work with our partners at the LIFO Coalition to explain the importance of LIFO and to highlight the significant opposition efforts to repeal the deduction in full or in part.

When similar legislation was introduced last fall in the U.S. Senate, the LIFO Coalition sent a letter to all senators opposing the repeal or modification of LIFO under any circumstances, including repeal targeted at specific industries. That letter explained that LIFO is an 83-year-old inventory accounting method allowed for both tax and generally accepted accounting principles (“GAAP”). It is used by a wide variety of companies and industries in the United States to allow them to deal with the effects of inflation on the pricing of inventory.

LIFO was designed to allow companies that sell inventory affected by inflation to match the increased cost of goods replacement. Revenue from the sale of the replaced inventory enables companies to remain in business by maintaining inventory levels.

The letter noted, “LIFO was not added to the tax code to benefit or punish any specific industry, but to allow all industries facing rising or widely fluctuating prices to remain profitable by matching deductions for the cost of goods sold with the cost of replacement inventory.” The letter concluded, “Repealing LIFO to arbitrarily target certain industries will unnecessarily risk supply chains, increase consumer costs, and cost jobs – setting a dangerous precedent for the hundreds of thousands of other businesses that rely on LIFO to survive.”

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