Congress Must Ensure That Any Changes to LIFO and Advertising Deductibility in Tax Reform Do Not Negatively Impact Small Business
Limiting the use of LIFO and advertising deductibility
would take working capital away from dealerships that could be used to maintain
or create jobs. Previous tax reform proposals would repeal LIFO and
significantly restrict the amount of advertising costs a dealership could
deduct each year. The House Republican “Tax Blueprint” is the basis for tax
reform legislation expected later this year. The Blueprint maintains LIFO but
does not specify how inventory or LIFO reserves will be treated. The Blueprint
is also silent on the tax treatment of advertising deductibility.
LIFO Repeal— LIFO (last in,
first out) is a longstanding inventory accounting method used by businesses to help
mitigate rising inventory costs. It allows companies to calculate their income
by basing sales on the newest inventory for goods, such as vehicles and parts,
which increase in price over time. As costs rise, LIFO is a more accurate way
of measuring financial performance. Dealerships use LIFO to better match the
cost of goods sold to the cost of replacing inventory, and its preservation is
critical for inventory management to manage price increases.
In the 113th Congress, a Senate proposal would have required recapture of
LIFO reserves in income evenly over eight years, and under a House bill (H.R.
1), LIFO reserves would have been recaptured in income over four years. The
Blueprint maintains the LIFO accounting method but is silent on how inventory
and LIFO reserves will be treated.
Advertising Deductibility - Dealers utilize advertising extensively since it is an integral component of
marketing vehicles and creating a competitive marketplace for consumers. A previous
Senate proposal would have made 50 percent of the advertising expense
deductible in the year the expense is incurred; the remainder would have been amortized
over five years. Previous tax reform legislation (H.R. 1) also would have
reduced the advertising deduction in the year incurred to 50 percent, with the
remainder amortized over 10 years. While the Blueprint is silent on the
treatment of advertising deductibility, Congress could attempt to limit
advertising deductibility in tax reform legislation.
- Restricting the use of LIFO would
have a significant effect on small business dealerships, as a majority of dealers use LIFO.
- For many small business dealers,
limiting the use of LIFO would
diminish their ability
to maintain and create jobs. In a recent survey, 39 percent of dealers stated that they “would have to lay off workers
or eliminate positions” if LIFO were repealed.
- Advertising has been an ordinary
and necessary business expense,
just like salaries,
rent for more
than 100 years and
should remain fully deductible in the year incurred. There is no evidence to support reducing or
delaying legitimate advertising deductions.
The House Republican “Tax Blueprint” outlines broad
principles that may be the basis of tax reform legislation expected later this
spring. The Senate and President Trump
have not released their approach to tax reform legislation. NADA
urges Congress to ensure that any changes to LIFO and advertising deductibility
do not negatively impact small businesses.
Download this brief
March 16, 2017