How Could A LIFO “Recapture Tax” Impact The Independent Supermarket Industry?

Sam’s Grocery Store, a single store, has been in business for 30 years and is a pillar of the community. The store has a $500,000 LIFO reserve. It has $10 million in annual revenue and has a 1 percent operating margin, leaving it with an after-tax profit of $100,000 per year. If the business had to pay back its LIFO reserve over a period of 10 years, it would pay $50,000 per year in LIFO recapture taxes; over 4 years, it would pay $125,000 per year in LIFO recapture taxes; over a single year, it would pay $500,000 in a LIFO recapture tax.

Sam’s Grocery Store would lose money if it had to repay the “LIFO recapture” tax over 1 or 4 years and would be under severe financial strain if it had to repay its LIFO reserves over 10 years.

In a 2014 survey of NGA members, respondents indicated that 45 percent use LIFO, and for those operating over 30 stores, 100 percent of respondents use LIFO.

LIFO reserves are bookkeeping entries. A business does not keep ready the cash reserves on hand to pay a “LIFO recapture” tax that Congress might impose. If a “recapture” tax were put in place, a business’ cash flow would be cut, forcing them to slow their growth, borrow, or possibly shut down completely.