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Is It Time for Your Dealership to Elect Off of LIFO?

With industry wide inventory shortages prevalent, many dealers have struggled to hold onto incoming inventory to meet the market demands. With some of the fluctuations in sales for new and used car dealerships, it will pose some problems going into year-end tax planning scenarios for those that have been valuing inventory under the LIFO accounting method.

Depending on the size of your LIFO reserve and the size of your inventory now in relation to the prior year, you could be in for a sizable income pick up which could have an impact on future tax scenarios for either the dealership or the pass-through owners.

This combined with expected income pick up associated with PPP loan forgiveness (note that the expenses contributing to the non-taxable forgiveness income are nondeductible essentially making the forgiveness itself taxable) could combine for a one-two punch that hinders your dealerships cash flow coming out of the first quarter of 2021. One consideration would be electing off of LIFO. Typically, with an accounting method change, you could elect to take in the reserve evenly over 4 years, reducing your potential tax event in the current year and taking advantage of what remains of some of the more favorable tax years ahead (think QBI). Not only would this apply for New Car LIFO but it could apply to many other inventory-based tax deferrals including dealer trade discounts. Make sure you consult with your dealership tax professionals at year-end planning to make sure a proper LIFO estimate is indexed. While dealers are coming out of some record-breaking gross profit months, it is still important to keep cash reserves and good tax planning is key to making sure the cash remains in your dealership in times it is needed.

For questions or further assistance, please contact a member of Withum’s Retail Automotive Services Group.

Withum is working with local and national industry groups to assess the need for Congressional relief as this is clearly an unintended consequence of the government-mandated shutdowns associated with the COVID-19 pandemic. However, dealerships should not count on this relief and should reach out to their Withum tax advisors to develop a strategy to minimize tax liabilities and help dealers hang onto cash.

Authors: Phil Craft, CPA | pcraft@withum.com and Brian Wallace, CPA | bwallace@withum.com

 Retail Automotive Services

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