Has LIFO come to the end of its run? LIFO, which stands for Last In, First Out, lets businesses account for inventories as though the last item purchased was the first to be used or sold. The accounting method was already threatened by the U.S. move toward international financial reporting standards (IFRS), which do not allow its use. Now the Obama administration has proposed repealing LIFO to raise revenue. Previous attempts by Congress to eliminate LIFO have failed, notes Robert Kilinskis, a managing partner at Deloitte. But this time may be different, he says, in part because of the cost of economic stimulus and other administration proposals.

LIFO's repeal is expected to raise $61 billion over 10 years. "Because of that need to pay for some of those initiatives, looking at $61 billion, it's hard to pass that up," Kilinskis says. "There actually is a good chance this time we'll lose LIFO, either through legislation or IFRS."

LIFO tends to boost a company's inventories and reduce its earnings, thus lowering its tax bill. But when a company stops using LIFO, it must pay taxes on its LIFO reserve–the amount by which using LIFO reduced its taxable income. Companies usually have four years to pay up; the Obama proposal would give them eight years.

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Susan Kelly

Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.