There are valuable lessons to be learned from the fact that thousands of franchised auto dealers nationwide are waiting anxiously to hear whether they’ll be reprieved from the huge income tax burden they face because they had employed “last in, first out,” or LIFO, accounting to track the cost of their new-vehicle inventories.
But first things first: It is imperative that the U.S. Department of Treasury immediately invoke Section 473 of the Internal Revenue Code and declare that the inventory shortages that have triggered LIFO liabilities for dealers were the result of a major foreign trade disruption caused by production issues related to the COVID-19 global pandemic.
Everyone across this industry knows the above statement to be true, as does the Biden administration and millions of consumers who tried to purchase a new vehicle last year. If Treasury simply recognizes this fact, existing law will allow dealers up to three years to recover their new-vehicle inventories and defer a major tax hit to their businesses, which will have occurred because of circumstances beyond their control.
In requesting this simple designation from Treasury, we gladly add our voice to that of the National Automobile Dealers Association, the Alliance of Automotive Innovation representing automakers and suppliers, the National Association of Minority Automobile Dealers, the Association of International Certified Professional Accountants and more than 100 members of Congress. The facts and the law demand that Treasury act with haste to do so.
As for the lessons for dealers caught in this pinch, it may be worthwhile to consider that the evolutions occurring across the industry in terms of changing products and changing inventory practices warrant a hard look at LIFO’s viability going forward. According to NADA, not one of the major public dealership groups uses LIFO, despite the potential tax savings it may offer. That is in part because those groups know too well the risks inherent in LIFO’s structure when inventories cannot be maintained. Dealers now facing enlarged income tax liabilities this year if Treasury doesn’t act should follow the publics to more stable accounting structures.
Dealers should also take note of who has stepped up to the plate to help, especially automakers and 19 Democratic senators. Neither may historically have been viewed as great champions of franchised auto dealers, yet their actions in this case warrant a reexamination of those long-established beliefs.