Under US generally accepted accounting principles, LIFO is one of the many ways that businesses can value their inventory on their balance sheets. The precision of accountants is clearly overrated.
The IRS has the LIFO conformity rule, which lets businesses use LIFO for federal income tax purposes only if they also value their inventory on their financial statements at LIFO.
Companies that economically benefit from using LIFO the most are ones whose inventories have increased in price the most.
Many companies using LIFO are pricing a good chunk of their inventory at prices of decades ago. Does that make any sense? I don't think so.
And the US is the only country in the world that permits its companies to use the clearly misleading LIFO Inventory method.
From reviewing the financial statements of large foreign-owned oil companies, I cannot tell whether they use LIFO Inventory for their US tax returns. Thus, they aren’t included below.
Also, the one huge US Big Oil Corp taking the patriotic route is Occidental Petroleum, which only has $176 mil of its inventory at the end of 2011 priced at LIFO. Thus, its LIFO Inventory is understated by only $98 mil from what it would be if properly priced at its Actual Current Cost of the Inventory. Thus, Occidental Petroleum is excluded below.
Here are the clearly five largest US Big Oil Corps obtaining the most economic benefit from using LIFO Inventory….and wow is this ever a massive, growing exponentially tax benefit these companies are receiving.
…....................….….12-31-11…....…12-31-11
………................…Inventory at…..Inventory
........…........………Current Cost…..at LIFO…….Difference
……....….........……………….(millions of dollars)
Exxon Mobil…………37,265…...…..11,665………..25,600
Chevron…….…………12,445…...……3,420….……...9,025
ConocoPhillips.….….11,787……....…3,387…….…...8,400
Valero Energy....…..12,423……....…5,623…….…...6,800
Marathon………………8,335…....……3,320….……...5,015
Total all Five..………82,255…...…..27,415….…….54,840
Yeah, these five US Big Oil Corps’ Inventory was stated on their books at LIFO Cost of $27.4 bil, which was a massive $54.8 bil less than the $82.3 bil of Actual Current Cost of their Inventory.
Thus the Current Cost of their Inventory was precisely 3 times the LIFO Inventory Cost they used in preparing their US income tax returns. How crazy is that?
Thus the way I do the quick math, results in a Total US Federal Income Tax Loophole received by these five US Big Oil Corps through the end of 2011 of 35% US Federal Income Tax Rate times this $54.8 bil difference, or Total Tax Loophole of a massive $19.2 bil.
And this $54.8 bil LIFO versus Actual Current Cost total difference for these five US Big Oil Corps has grown rapidly as oil prices have moved up. Check out the growth of this number since the end of 2008.
December 31, 2008…..$22.8 bil
December 31, 2009…..$35.8 bil
December 31, 2010…..$45.3 bil
December 31, 2011…..$54.8 bil
And then just check out how these LIFO versus Current Cost Inventory differences for four of these five US Big Oil Corps has grown so rapidly as oil prices have moved up so much since the end of 2008.
………………....……..……..12-31-11…12-31-10…12-31-09…12-31-08
………………………………………(millions of dollars)
Exxon Mobil….…………..25,600…….21,300……17,100…...10,000
ConocoPhillips…….………8,400……...6,800……..5,627….…..1,959
Valero Energy………….....6,800……...6,100……..4,500…….….686
Marathon……….……….....5,015….…..4,119….…...3,115….…….777
In this substantially increasing oil price environment, this massive tax loophole will continue to grow exponentially and thus accumulate to a gargantuan amount many years out.
By eliminating LIFO Inventory for these five US Big Oil Corps, the economic damage to these Big Oil Corps is substantially softened. Let me explain.
For the US Big Oil Corps that would be required to switch out of LIFO for US federal income tax purposes, the logical action will be for them to also switch out of LIFO in their financial statements. Thus, there will be no income tax expense charge in their income statement from this switch out of LIFO. Further, by switching out of LIFO, this should increase their Gross Margins and their Pretax earnings on their income statements, as well as significantly increase their total inventory, their total retained earnings and their stockholders’ equity, thereby strengthening their balance sheets.
And it wouldn't surprise me if the foreign-owned Royal Dutch Shell and BP have both figured out ways to use LIFO Inventory for their US operations. If so, this $19.2 bil of Total Tax Loopholes just through the end of 2011 should move up to close to $30 bil.
When you think about it and look at the magnitude of these Tax Loophole amounts related to the use of LIFO Inventory by US Big Oil Corps, especially when you project these massive Tax Loopholes in an increasing oil price environment for many years out, the clear conclusion is that the LIFO Inventory Tax Loophole dwarfs all of the other Tax Loopholes for US Big Oil Corps.
When you think about it and look at the magnitude of these Tax Loophole amounts related to the use of LIFO Inventory by US Big Oil Corps, especially when you project these massive Tax Loopholes in an increasing oil price environment for many years out, the clear conclusion is that the LIFO Inventory Tax Loophole dwarfs all of the other Tax Loopholes for US Big Oil Corps.
Thus, it is difficult for me to understand why the US Congress would close the other Tax Loopholes of US Big Oil, and not also close the LIFO Inventory Tax Loophole, which is substantially more robust than the other ones.
And the US Big Oil LIFO Inventory Tax Loophole is just as egregious, and probably even more so, then all the other Big Oil Corp Tax Loopholes, except the one that permits US Big Oil Corps to deceptively reclassify a huge chunk of their Foreign Royalties as Foreign Income Tax Expense, thereby inappropriately giving them a 100% dollar-for-dollar US Federal Income Tax Credit.
Yeah, what that means is that effectively US taxpayers are paying for a huge chunk of these royalties paid to foreign governments to deplete the foreign country's natural resources and where the US Big Oil Corp initially pays the foreign royalty and then subsequently gets a 100% US Federal Income Tax Credit. And what is the share of these US Big Oil foreign venture profits going to the US taxpayers, who are effectively funding these foreign royalties? Zero. No upside, only a certain downside cost. And then to pile on, this same US Big Oil Corp punishes the US taxpayer at the pump by charging exorbitant gas prices.
How the US Congress, working on behalf of the 1% Big Oil, was able to snow US citizens on that one just absolutely amazes me. And the US Congress still wonders why the 99% feels it cannot trust them to do what's right, and why their favorable approval rating is so incredibly low, and which, by its actions nearly always being on behalf of the 1%, is headed much lower?
And frankly, if the US Congress were to include the closing of this massive LIFO Inventory Tax Loophole in with their other ones, it gives them a much better opportunity to be able to address the long-term energy independence problem as well as the short term and medium term high gas prices.
What I would do is to use some of these extra tax revenues from the closing of this massive LIFO Inventory Tax Loophole to provide tax incentives for the near-term, whole-scale mass development of vehicles, both new and used, that can also run on natural gas.
Right here in Evansville, IN, there is only one natural gas station, which is selling natural gas for only $1.30 per gallon. On the other hand, many of the gas retailers here are now selling regular gas for $3.99 per gallon.
And natural gas is the cleanest burning of the fossil fuels. Because there is no carbon deposits in the engine, natural gas vehicle engines last much longer than regular gas vehicle engines.
And natural gas is safer than regular gas.....it's less likely to cause a fire.
And most important of all, natural gas is abundant in the US.
It's pretty clear to me that the country, especially the US Congress, has so far been behind the curve in taking advantage of this opportunity to solve both its long-term energy foreign oil dependence problem, which is so important for both national security and for US economic growth, and its current short-term extremely high gas price problem.
And so has the US Auto Industry. The only Auto company selling a natural gas vehicle in the US is Honda, with its Honda Civic Natural Gas Car. And this Honda Civic doesn't also run on regular gas, it only runs on natural gas. Some Natural Gas Cars sold in foreign countries run on both regular gas and natural gas.
Toward this end, I would focus like a laser on providing lucrative tax incentives to the auto industry and other industries to both build new and convert old autos and other vehicles in the near term which can also be run on natural gas. I would give this auto industry, other industries and any outside research and development work done to make this transition to natural gas vehicles happen very highly-charged, immediately refundable Research and Development Tax Credits. And I would also give lucrative energy tax credits to purchasers of natural gas vehicles and to those spending money to convert any existing vehicle to being able to also be run on natural gas.
And the US Dept of Energy should devote a lot more of its resources on Research and Development that would permit both new and used vehicles to also run on natural gas. I'd even devote some of the tax revenues from closing these Big Oil Tax Loopholes to be specifically devoted to US Government Research spending on natural gas vehicle solutions.
Further, I think it would be keen for the US Government to do a huge reallocation of its resources from US Dept of Defense to the US Dept of Energy in order to tackle a quick development of vehicles that can also run on natural gas. When you think about it, the country's national security is much better addressed with the country being energy independent, not having a massive National Debt load, and also having a thriving economy, one not weighted down by Big Oil's python-like choke on it, than fighting costly wars in the Middle East.
And the EPA should be much quicker in approving natural gas vehicle conversions.
Also, I think the US Government should do what it can to see to it that there is a near term massive expansion of natural gas refineries in the private sector.
And I also think the US Government should do what it can to expedite natural gas retail locations all throughout the country, and focus particularly, right away, on natural gas retail locations on the country's interstate, national and state highway systems. I'd even think outside the box and try to facilitate natural gas locations which now are not owned by big Gas Retailers Exxon, Chevron, BP and Shell. And I can envision some visionary, very patriotic non-gas retailers seeing the economic advantage of having a natural gas fill up place on their premises.
And yes, I also think the US Government should do what it can to expedite carefully vetted, environmentally sound, safe natural gas pipelines all throughout the country.
And lastly, it is also very difficult for me to understand the fairness of solving the US Debt problem by cutting Medicare benefits and Social Security benefits, while at the same time, allowing these Big Oil Corps to continue with this massive LIFO Inventory Tax Loophole, which any fair CBO scoring will be more than $50 bil of additional US tax revenues over the next ten years, and substantially more than $100 bil over the next twenty years.
And the US Big Oil LIFO Inventory Tax Loophole is just as egregious, and probably even more so, then all the other Big Oil Corp Tax Loopholes, except the one that permits US Big Oil Corps to deceptively reclassify a huge chunk of their Foreign Royalties as Foreign Income Tax Expense, thereby inappropriately giving them a 100% dollar-for-dollar US Federal Income Tax Credit.
Yeah, what that means is that effectively US taxpayers are paying for a huge chunk of these royalties paid to foreign governments to deplete the foreign country's natural resources and where the US Big Oil Corp initially pays the foreign royalty and then subsequently gets a 100% US Federal Income Tax Credit. And what is the share of these US Big Oil foreign venture profits going to the US taxpayers, who are effectively funding these foreign royalties? Zero. No upside, only a certain downside cost. And then to pile on, this same US Big Oil Corp punishes the US taxpayer at the pump by charging exorbitant gas prices.
How the US Congress, working on behalf of the 1% Big Oil, was able to snow US citizens on that one just absolutely amazes me. And the US Congress still wonders why the 99% feels it cannot trust them to do what's right, and why their favorable approval rating is so incredibly low, and which, by its actions nearly always being on behalf of the 1%, is headed much lower?
And frankly, if the US Congress were to include the closing of this massive LIFO Inventory Tax Loophole in with their other ones, it gives them a much better opportunity to be able to address the long-term energy independence problem as well as the short term and medium term high gas prices.
What I would do is to use some of these extra tax revenues from the closing of this massive LIFO Inventory Tax Loophole to provide tax incentives for the near-term, whole-scale mass development of vehicles, both new and used, that can also run on natural gas.
Right here in Evansville, IN, there is only one natural gas station, which is selling natural gas for only $1.30 per gallon. On the other hand, many of the gas retailers here are now selling regular gas for $3.99 per gallon.
And natural gas is the cleanest burning of the fossil fuels. Because there is no carbon deposits in the engine, natural gas vehicle engines last much longer than regular gas vehicle engines.
And natural gas is safer than regular gas.....it's less likely to cause a fire.
And most important of all, natural gas is abundant in the US.
It's pretty clear to me that the country, especially the US Congress, has so far been behind the curve in taking advantage of this opportunity to solve both its long-term energy foreign oil dependence problem, which is so important for both national security and for US economic growth, and its current short-term extremely high gas price problem.
And so has the US Auto Industry. The only Auto company selling a natural gas vehicle in the US is Honda, with its Honda Civic Natural Gas Car. And this Honda Civic doesn't also run on regular gas, it only runs on natural gas. Some Natural Gas Cars sold in foreign countries run on both regular gas and natural gas.
Toward this end, I would focus like a laser on providing lucrative tax incentives to the auto industry and other industries to both build new and convert old autos and other vehicles in the near term which can also be run on natural gas. I would give this auto industry, other industries and any outside research and development work done to make this transition to natural gas vehicles happen very highly-charged, immediately refundable Research and Development Tax Credits. And I would also give lucrative energy tax credits to purchasers of natural gas vehicles and to those spending money to convert any existing vehicle to being able to also be run on natural gas.
And the US Dept of Energy should devote a lot more of its resources on Research and Development that would permit both new and used vehicles to also run on natural gas. I'd even devote some of the tax revenues from closing these Big Oil Tax Loopholes to be specifically devoted to US Government Research spending on natural gas vehicle solutions.
Further, I think it would be keen for the US Government to do a huge reallocation of its resources from US Dept of Defense to the US Dept of Energy in order to tackle a quick development of vehicles that can also run on natural gas. When you think about it, the country's national security is much better addressed with the country being energy independent, not having a massive National Debt load, and also having a thriving economy, one not weighted down by Big Oil's python-like choke on it, than fighting costly wars in the Middle East.
And the EPA should be much quicker in approving natural gas vehicle conversions.
Also, I think the US Government should do what it can to see to it that there is a near term massive expansion of natural gas refineries in the private sector.
And I also think the US Government should do what it can to expedite natural gas retail locations all throughout the country, and focus particularly, right away, on natural gas retail locations on the country's interstate, national and state highway systems. I'd even think outside the box and try to facilitate natural gas locations which now are not owned by big Gas Retailers Exxon, Chevron, BP and Shell. And I can envision some visionary, very patriotic non-gas retailers seeing the economic advantage of having a natural gas fill up place on their premises.
And yes, I also think the US Government should do what it can to expedite carefully vetted, environmentally sound, safe natural gas pipelines all throughout the country.
And lastly, it is also very difficult for me to understand the fairness of solving the US Debt problem by cutting Medicare benefits and Social Security benefits, while at the same time, allowing these Big Oil Corps to continue with this massive LIFO Inventory Tax Loophole, which any fair CBO scoring will be more than $50 bil of additional US tax revenues over the next ten years, and substantially more than $100 bil over the next twenty years.
