Jamie Pentagulio

2020 was an interesting year, to say the least, and auto dealers on LIFO are no exception to that. Having significantly lower ending new vehicle inventories than the year before has caused many of them to incur significant reductions in LIFO reserves (also known as LIFO reserve recapture or repayment) that may have caused significant increase in taxable income for 2020. Unlike Paycheck Protection Program loans, this repayment is unlikely to be forgiven. We hope to give you some insight and solutions to this issue.

The size of LIFO recapture depends on the buildup of your inventory over recent years and how much inflation is embedded in LIFO calculations. Often, dealers are surprised to see how small LIFO recapture is, even though inventory levels have dropped significantly at y/e. The amount of the LIFO recapture also varies if you have solely new vehicles on LIFO or the entire inventory of new and used cars.

To help offset the increase in income in your 2020 tax return due to recapture on new vehicles, you can expand the auto dealer LIFO election used vehicles for 2020 if you haven’t already done so. As the inflation is remarkably high on them right now, this should make a notable difference. According to the Manheim Index of Used Vehicle Prices, inflation in the used vehicle arena has seen a jarring rise of 41% since the Covid-19 pandemic reached the shores of The United States in February 2020. While used-vehicle inflation typically fluctuates, this again is another option to deflecting the recapture. Also, you may consider changing to an external inflation measurement source that uses Bureau of Labor Statistics Consumer or Producer Price Indexes (BLS CPI/PPI) known as the IPIC method. This allows dealer inventory to be measured by government inflation indexes & simplifies auto dealer LIFO calculations.

Many auto dealers on LIFO had very profitable operations in 2020 and are surely looking for ways to reduce their taxable income. Expelling elected costs (i.e., floorplan assistance programs) from the ending inventory is a great income-reducing strategy for dealerships in this scenario. While it’s not always without hurdles, electing LIFO is a great start for those not currently taking advantage of its tax savings capabilities. If you’re wondering if your dealership is a good candidate for electing LIFO, we’d be happy to do a complimentary LIFO election benefit analysis. If you’re questioning if your current LIFO is maximizing tax savings, we also provide LIFO Calculation, Methods & Best Practices Review at no cost to be sure you’re getting the most out of LIFO.

Other options auto dealers on LIFO can take on themselves to deflect these recaptures include getting an extension to file 2020 tax returns. The longer you are able to delay them, the more insight you will have in to the inflation / deflation of 2021. You could also try to get relief under Section 473 in your 2020 income tax return. There are a lot of people behind the scenes working to get some form of relief for the dealers put in the unexpected position of large LIFO reserve recaptures.

Portions of this blog were derived from an opinion article written by Will De Filipps in the Automotive News on April 5th, 2021. His article can be read by following the link below or by contacting Will at Will@deflipps.com

De Filipps Article on Layer Erosion LIFO Income De Filipps Proposal for Section 473 Relief