A standard inventory accounting practice widely used in the electrical industry and elsewhere has caught the attention of Congressional leaders and the White House in the midst of their budget negotiations. With Republicans in Congress refusing to accept any kind of tax increase and the federal government's debt limit hanging in the balance, President Obama and Congressional Democrats are looking for any source of additional revenues they can find to offset federal spending.

One proposal the White House has floated would change the tax code to eliminate the option for companies to account for inventory on a “last-in, first-out” basis — LIFO, for short. LIFO has been used since it entered the tax code in 1939 by companies whose inventory is subject to large changes in valuation and by small businesses with thin capitalization. Compared with its alternative, FIFO (first-in, first-out), in which inventory is valued at its actual purchase cost, LIFO allows a company to value its inventory based on replacement cost, lowering the tax burden when the cost of inventory replenishment is rising, but increasing tax liabilities when prices fall.

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