There can be no doubt that tax reform is desperately needed. The U.S. tax code is unbearably complex, creating inefficiencies that have a direct impact on business.
However, reform should never come at the expense of the small businesses that drive our economy and contribute to the American dream.
At issue is the future of the “last in, first out” accounting method, known as LIFO. It’s an accepted method for dealing with inventory, which has been recommended by CPAs and used primarily by small companies in the U.S. for nearly three-quarters of a century.
LIFO helps to protect cash flow during inflationary periods, so businesses can purchase the products, materials and equipment they need to operate.
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Now Congress, prompted by the desire to fund various initiatives, is considering banning LIFO. The ramifications this would have on the economy, and Main Street in particular, are serious.
Forcing a business using LIFO to change to a different accounting method would definitely increase taxes now and in the future. But LIFO repeal also claws back to previous tax years, resulting in retroactive tax increases that are overwhelmingly punitive.
In most cases, the switch will trigger taxes on accumulated LIFO reserves going back for years, possibly even decades. The tax bill for a single small company could run into the tens or even hundreds of thousands of dollars.
These funds would be great for the federal budget, but the costs would be debilitating for affected small businesses. And, in the long run, even the federal budget will suffer when some of these small businesses go under because they can’t afford to pay their taxes.
In addition, businesses forced to switch to another inventory method will face more costs to change their record-keeping and software systems. These headaches will further distract owners from the real work of maintaining and growing their business. It’s a nightmare scenario that lawmakers don’t think about and many owners aren’t even aware of.
So why is LIFO repeal even being suggested? The answer is to offset tax breaks for others.
Proposals to repeal LIFO are not based on sound policy and do not have the best interests of the thousands of businesses using LIFO in mind. Instead, they are an expedient way for Congress to raise taxes on the businesses and their owners who can least afford it and don’t have the resources to push back.
And because small companies are the country’s true economic engine and significant job creators, we can all expect to feel the pain.
LIFO is not a subsidy, loophole or handout. It’s an accounting method that allows small business owners to manage their cash flow, maintain inventories and accurately track their income.
Repealing LIFO is not tax reform. It’s a tax increase on our local employers here in Kansas.
Congress can and should find other offsets that won’t damage Main Street. Alternatives are out there.
Our elected representatives in Congress can choose to keep LIFO for the sake of small businesses and can enact pro-business tax reforms that reach all the way down to Main Street.
Ken Daniel is a founder of the Topeka Independent Business Association.
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