WASHINGTON — With record-low levels of new-vehicle supply and no near-term fix for replenishment, most dealerships using the “last in, first out” inventory accounting method now face significant tax burdens, and the deadline to pay up is fast approaching.

Businesses on LIFO — a tax deferment strategy used by about half of the nation’s new-vehicle dealerships — must maintain a sufficient level of inventory at year end to avoid triggering a potentially large income tax bill.

But production issues related to COVID-19 and the microchip shortage greatly reduced the flow of new vehicles to dealership lots and curtailed inventories starting in 2020 and worsening in 2021. That made the long-deferred income suddenly taxable at federal and state levels.

For some dealers, the LIFO recapture has led to additional tax payments from $100,000 to $2 million or more, and those bills are due in less than two weeks for dealerships structured as pass-through entities or C corporations.

“Whether they file an extension or don’t file an extension, they still have to pay the tax by April 18,” said Dan Cheyney, national practice leader of the automotive and dealer services group at accounting firm Moss Adams. “The urgency is very real.”

Despite a barrage of fruitless attempts by the National Automobile Dealers Association, a bipartisan group of U.S. lawmakers and others to persuade the Treasury Department to activate a never-before-used provision, known as Section 473, in the nation’s tax code that could provide relief to dealers, a sliver of hope remains.

U.S. Rep. Dan Kildee, D-Mich., introduced legislation April 4 that would provide tax relief to dealerships on LIFO that have struggled to maintain inventory levels because of the global microchip shortage.

The bipartisan bill — known as the Supply Chain Disruptions Relief Act — would allow dealerships to wait until as late as 2025 for their inventories to be replaced to determine the income attributable to the sale of inventory during 2020 or 2021, giving dealers time to restock as the chip shortage eases and auto production returns to pre-pandemic levels.

“We literally make the law,” Kildee told Automotive News this month. “If a situation arises where the existing law either isn’t adequate — or it’s not clear that it’s adequate — to provide this relief, then obviously we change the law.”

Kildee’s bill would permit those dealerships to file amended tax returns or offset tax liability on future returns to claim relief, according to an NADA analysis. The bill also would direct the Treasury Department to issue regulatory guidance to allow dealers to calculate LIFO during the extended replacement period.

“Treasury indicated its unwillingness to do so, and so Congress is moving forward, showing the leadership to provide the meaningful relief that’s needed to respond to the global supply chain crisis and all of the problematic consequences that it has created,” said Paul Metrey, NADA’s senior vice president of regulatory affairs.

David Regan, NADA’s executive vice president of legislative affairs, said getting the bill passed is a “top grassroots priority” for the association. “We want to pursue this very aggressively over the course of the year,” he said. Kildee’s bill has the support of Republican Reps. Mike Kelly and Roger Williams and Democratic Rep. Don Beyer — all of whom are car dealers — and at least four other representatives.

In the Senate, Democrat Sherrod Brown of Ohio is expected to introduce a similar bipartisan bill “in the coming weeks,” his office said.

Said Joe Magyar, managing partner of the retail dealership services group at accounting, consulting and technology firm Crowe: “It’s a potentially huge win for dealers to address a unique and unprecedented situation that would have a significant tax implication on dealers and really should not be happening, just simply because of events that are beyond their control.”

While NADA ramps up its advocacy efforts, many tax advisers are recommending dealers file for an extension and pay the estimated tax, including any LIFO recapture that’s due, as they wait to see whether relief will come before the end of the year.

“It’s a very broad issue for dealers, and the magnitude of this is very significant for those dealers that are impacted,” Magyar said. “It would not be unusual for a dealer to have another million dollars or more of income as a result of this LIFO recapture occurring most predominantly during 2021.”

And the taxes on that additional income add up considerably.

Magyar said dealership clients at his firm are reporting LIFO recapture income between $400,000 and $6 million. Federal tax would be nearly 30 percent of those amounts in most cases, and then dealers have to pay state taxes, which vary widely, he noted. At the federal level, that could mean additional tax payments of more than $100,000 and approaching $2 million.

In an extreme example, Buddy Dearman, managing partner of accounting firm Dixon Hughes Goodman’s dealership practice, said one client with six stores is facing $23 million in LIFO recapture. That would equate to about $11 million in federal and state tax expense, he said.

While it’s a big deal for most dealerships on LIFO, “it’s a much more significant impact to dealers that have been around for a long time,” said Moss Adams’ Cheyney.

The LIFO recapture, too, could deplete cash flow that will be needed to invest in new-vehicle inventory once auto production normalizes.

“We’re all experiencing a good time for cash flow in the business because the cash is not invested in inventory, but as inventory levels return, dealers are going to be investing this cash … in order to get back in the game, and they need to have reserves for the investment in inventory they’re about to make,” Cheyney said.

“What’s the ripple effect of this cash event happening now on their ability to adjust to returning inventory levels in the future?” he continued, “I think that’s where we’ll really see impact, especially smaller dealers.”

To soften the blow, dealers could opt for alternative accounting methods, such as the Inventory Price Index Computation, which allows dealers to add used vehicles and parts inventories to their new-vehicle pool.

But “there’s risk to using that method because used-vehicle inventories have had an incredible amount of inflation this year,” Dearman explained. “If you elect that method, you’re stuck with it for the next five years,” and those used-vehicle values could decrease significantly over that period and potentially trigger another LIFO recapture.

Sans relief, dealership clients of Scott Lewis, firm leader of dealer services at Rosenfield & Co., are filing for extensions and preparing to pay up.

“Whatever the number is, it is what it is, and they’ll just pay it,” Lewis said. “They’re not happy about it, but they realize it is what it is, and they can just hope that something happens.”