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May 16, 2022

What Is LIFO And Why Is It So Important To The Industrial Metals Sector?

Last week, two scholars at the Urban/Brooking Tax Policy Center argued the recent increased in oil prices and spike in inflation have boosted tax benefits from the “last-in, first-out” (LIFO) inventory accounting method. They argued LIFO “exaggerates” deductions and understates income and tax liability relative to average cost inventory accounting and said repealing LIFO would raise about $1 billion annually while reducing tax subsidies for fossil fuels.

As a reminder, MSCI is a member of the LIFO Coalition, which works to highlight the benefits of LIFO across industries, including for the industrial metals sector. As the coalition has explained, LIFO is not a tax matter. It is a nearly eight-decade old inventory accounting system that does not even meet the statutory definition of a tax expenditure. The purpose of LIFO is to:

  • Track product. A business always wants to have adequate inventory on hand to meet demand, whether manufacturing, distribution, or retail.
  • Track costs. Businesses must manage cash flow to maximize efficiencies. Since inventory items tend to be fungible, inventory conventions are an important part of tracking costs.
  • To determine income. The tax code requires taxpayers to use the best inventory accounting practice in the trade or business that most clearly reflects income. FIFO (First-in, First-out) is best suited to a business with falling prices. LIFO is best suited to a business with rising prices.
  • Closely match the cost of goods sold with the cost of the replacement inventory the company must purchase in order to remain in business.

LIFO is used by a diverse array of American companies, including hundreds of thousands of pass-through businesses, to most accurately record inventories and measure income. Despite the widespread use of LIFO, repeal has been considered several times by Congress as a way to raise revenues to offset various spending initiatives or to pay for certain tax reform objectives.

The LIFO Coalition and MSCI will continue to argue for the preservation of LIFO.

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