Ed Orlet, NAED Vice President of Government Affairs, has written the following letter to LIFO distributors:
In late June, the U.S. House of Representatives GOP Tax Reform Tax Force released a “blueprint” for tax reform. The blueprint calls for eliminating many deductions and expenditures in the code, coupled with lower tax rates and a provision to allow companies to write off the purchase of many business assets in the year of purchase – “full first year expensing.” Inventory was specifically excluded from their first year expensing proposal, and LIFO specifically preserved, but with language making it clear that further discussion of both inventories and LIFO was anticipated.
The issue being debated in the U.S. House Ways and Means Committee today is not whether to repeal LIFO and require LIFO users to move to FIFO with payment of the recapture tax. Rather, they have not made a decision as to whether to include the purchase of inventory in their full expensing regime, and they have asked us for our input.
We fully understand it is not possible for you to know whether you would prefer expensing to LIFO without knowing how they propose to handle your existing inventory and LIFO reserves. We have therefore consulted with the LIFO Coalition’s technical experts to determine the best possible scenario for LIFO users if the Congress moves toward expensing. There are a number of scenarios that Congress could pursue, but before we explore any of them we need to know what you would choose to do if given the option of moving to expensing under the most favorable circumstances. Therefore:
Assume a theoretical tax reform proposal that allowed businesses, going forward, to write off the full amount of their purchases of business assets, including inventory, in the year of purchase (“full first year expensing”). To transition from LIFO to full first year expensing, LIFO taxpayers would be able to fully deduct the basis of their inventory on hand as of the effective date when expensing takes effect. No recapture tax would be imposed on the LIFO reserves accumulated by the businesses during their years on LIFO.
January 1, 2018 effective date of full first year expensing
December 31, 2017 basis of LIFO inventory = $150
December 31, 2017 LIFO reserve balance = $400
2018 purchases of inventory = $600
For tax year 2018, deductions for inventory total $750 ($150 + $600)
There is no tax impact for the $400 LIFO reserve balance. The amount has already been deducted in prior years. Because inventory purchases are now fully deductible, no recapture tax applies.
If given the choice, would you prefer to operate under such a full first year expensing regime or, alternatively, would you prefer to continue to operate under LIFO as it is now configured?
Please send me your thoughts and note that your responses will be kept confidential – we will not identify any company with any preference or response. But please do reply – we cannot provide reliable guidance to the House tax-writers without your input.
Vice President, Government Affairs
National Association of Electrical Distributors
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