|LIFO: an old puzzle for dealers in a new era|
The esotericism of tax accounting is not very exciting. In fact, it can be downright confusing for those of us who aren’t CPAs. However, when your cash flow is in danger of taking a big hit due to circumstances beyond your control — even in a year that has seen record dealership profitability — it gets your attention.
This week, Automotive News examines how the link between the global microchip shortage and the commonly used inventory accounting method known as LIFO – or last in, first out – is likely to result in extraordinary tax bills for thousands of dealers across the country this spring.
LIFO is typically used by small and medium auto retailers, although some large ones also use it, as a tax deferral strategy, for years or even decades. It’s important to note that it’s not used to completely avoid taxes – it helps manage cash flow from year to year. In the end, the taxman will be get his money.
But dealers on LIFO rely on a steady stream of new vehicle inventory. As the microchip crisis has dramatically restricted the flow of new vehicles to retail lots, their inventory levels have dropped dramatically in 2021, leading to significantly higher taxable income related to cost of goods sold. .
This is not the first time that LIFO has granted tax adjustments to dealers. A journey through Automotive News‘ archives find stories on this issue dating back to the 1990s. A small sample:
■ June 26, 1995, “IRS Rulings Mean Tax Danger for Dealerships”: How dealers could face six-figure tax bills for past mistakes they’ve made using LIFO.
■ August 25, 1997, “NADA and IRS Reach Compromise on LIFO”: After about three years of negotiations, the National Automobile Dealers Association reached an agreement with the federal tax authority on the issue of LIFO compliance. This gave dealers a safe harbor for future LIFO calculations and reduced penalties for past errors.
■ December 17, 2001, “Zero percent generates a big tax bill”: The downside of the surge in sales triggered by 0% financing: Dealers faced much larger tax bills if they didn’t replenish inventory by the end of the year.
■ January 25, 2010: “This year, LIFO is an ‘Oh, no!’ at tax time. Coming out of the Great Recession and the Cash for Clunkers program that boosted sales but depleted inventory, dealers ran out of inventory at the end of the year. An accountant with more than 200 auto detailing clients said on LIFO, “We’ve ruined a lot of dealers’ day.”
Last spring, Will De Filipps, a CPA specializing in dealer tax matters, made the connection between tight inventory and LIFO to Automotive News‘ Warning. His April 5 op-ed, “Dealing with Dwindling LIFO Reserves,” offered advice to retailers who might need to deal with the issue.
Fast forward to today: NADA, the Automotive Innovation Alliance and members of both houses of Congress have a solution, but it would take an unprecedented move by the federal government to provide relief — and time. hurry.
What is this solution? Come back to Automotive News tomorrow to find out.
— Omari Gardner