President Obama's Budget includes as a tax loophole closer a proposal to repeal the lower of cost or market inventory accounting method (LCM).
Under LCM, companies may write down items in their inventories that are unsalable at normal prices or are otherwise damaged to reflect the fact that the market value of the goods has dropped below cost.
LCM is a clear departure from the consistent IRS treatment of not allowing a write off until an asset is sold.
To show just how crazy LCM is, let's say that an investor owns a basketful of common stocks. Some of them have suffered damage, and thus have gone down say 25% in market price. An investor would love to be allowed to take the decline in value of his individual stocks even though he hasn't sold them. He can't but yet a business with inventory can. Where's the fairness here?
Give me a break! LCM for tax purposes is a morale outrage. It is an egregious tax loophole. The only reason it is allowed now is that the US Congress has again succumbed to the pressure of special interests like the retail industry.
My recommendation is to repeal LCM for tax purposes. All the money raised here, which should be roughly $10 bil over the next ten years, should be used to reduce the US Debt.
And the economic damage to companies from its repeal is softened since this write-off is not lost, it is only delayed to when the inventory is sold or otherwise disposed of. Thus there would be no income tax charge to the company's income statement from LCM's repeal.
