The Comeback Player of the Year – LIFO

Much was made (and continues to be made) of the 2020 and 2021 Great LIFO Recapture. As dealerships struggled to fill customer orders and lots were empty, alarm bells were ringing everywhere about the phantom income related to LIFO recapture.

The argument could be made (and was made) that this recapture was coming at a time when dealerships had the actual cash profits to foot the tax bill related to LIFO, and it was also a good amount of recapture during a time when tax rates are lower than they have been for decades. Long story short – yes, there was a certain amount of “pain” related to LIFO recapture, but the cash was generally there to pay the tax bill. 

NADA lobbied hard and continues to do so to get some sort of LIFO relief in place. What that relief would look like and how it would function would essentially be figured out once the overall premise was agreed to. While some folks are continuing to pine away for this relief, there is a bit of a twist to the story – the LIFO adjustments this year should almost universally be an expense. 

While the details of the LIFO calculation are mind-numbing, the essentials are this: you compare the current year’s base model cost to the prior year’s base model cost for the same vehicle, and the increase or decrease in that cost determines what your index is this year, which is then a major factor in determining your LIFO adjustment for the year. Is that somewhat of an over-simplification – yes, but it is fundamentally how it works. In any given year, despite how much your inventory increases, you can only get some maximum amount of LIFO deduction. As many stores are seeing as 2022 comes to a close, there is a dramatic increase in new vehicle inventory on hand when compared to this time in 2021 (in some cases, two or more times the amount of new vehicle inventory on hand at the end of 2022 versus the end of 2021). As mentioned previously, the LIFO deduction gets limited at some point based on the increase in inventory; however, not only is the number of units on hand increasing at dealerships across the country, but the cost  of those units when compared to the same units last year has also increased significantly. 

What does this mean to you? Barring huge decreases in the amount of inventory on hand between now and December 31, your dealership should get a decent LIFO deduction for 2022. Even if your inventory units on hand were similar from the end of 2021 to the end of 2022, your dealership should benefit from some LIFO deduction due to the increases in the base model prices. LIFO works best in an inflationary environment, and no matter what news station you watch at night, the cost of everything has increased during 2022. 

While it generally will not be a complete reversal of the LIFO recapture that has happened during 2020 and 2021, this is a bit of a reprieve.