06-20-07 by dugan
We’re seeing oil industry clout chip away at the vigor of the energy bill. Today Big Oil got to keep an accounting trick that saves it $4.3 billion a year in taxes, cheats investors and suppresses true profit figures. Keep reading if you want to find out how that works.
Sen Charles Schumer of New York, the most knowledgeable senator on oil industry issues, had proposed banning the biggest oil companies from using what’s called “last in, first out” accounting for their inventories of crude oil. Republican leaders quashed it today, part of their price for letting the Senate bill go forward. (Another industry victory was retention of an oil depletion tax deduction that keeps increasing as oil prices rise, with no cap, and no regard for what the oil actually cost to drill. That one’s worth billions, too).
But back to the accounting trick, known by its IRS acronym, “LIFO.” If it were applied to you and me, we’d be able to report current salary as though it was what we were earning 10 years ago.
Here’s how it works: Let’s pretend that each oil company has all of its inventory in a giant tank. The oil in that tank comes from different periods of time, and given the steady rise in the price of oil, the oldest inventory was far cheaper to acquire than newer stuff. Yet it’s all oil, and mixed together.
When sales of the oil are reported to the IRS, however, Big Oil’s accountants make the assumption that what’s been sold was the last batch acquired, the most expensive one. That same assumption is applied to every sale, so three things happen:
1. The sales are booked as being less profitable, because the presumed acquisition cost of the oil is higher than the presumed cost of what’s left in the tank;
2. And, because what’s left in the tank is (for tax purposes) now worth less than what’s been sold, any tax on inventory is now lower.
3. As new oil comes into the imaginary “big tank,” it is presumed to be what is sold first, continuing the cycle of “expensive” sales with lower profit, and the reduction in value of remaining inventory. It’s a perpetual machine.
The result?
• Oil companies prevent their record profits from looking even more rapacious.
• The companies avoid $4.3 billion in taxes that they would have paid by accounting for inventory in any common-sense way.
• Investors don’t get the dividends that they would if accountants tallied profits without the LIFO trick.
The energy bill is still in flux, and the money to finance renewable fuels is supposedly going to come from other taxes on the oil industry. But Big Oil has certainly gotten its way on one of its favorite, and still legal, IRS tricks.
Unfortunately, the IRS wouldn’t allow us to LIFO personal income, even if we actually had a big inventory of cash. It’s all in the lobbying clout.
If you’d like to do something about LIFO, contact Schumer’s office at (202) 224-6542 and let him know you’re also ticked off about this accounting scam. Urge him to keep pushing his separate bill, S. 666, banning Big Oil’s use of LIFO for good.
You could also call Sen. Charles Grassley, who is honchoing the energy bill from the GOP side, and tell him how upset you are that he carried Big Oil’s case to kill the LIFO ban. His office: (202) 224-3744