The SD Auto Advisors were all over the Inventory Price Index Computation (“IPIC”) method of accounting for our automotive dealerships’ inventory for the 2021 tax filing year. We saw some serious tax savings by capitalizing on inflation and combining more inventory items into our LIFO pool.
If you recall, we experienced the following in 2021:
LIFO pools – we combined new, used and parts inventory in one LIFO pool.
New vehicle inventory – Dealers had a drastic drop in total inventory and had inflation of 12%
Parts – Dealers had a drop in inventory and had inflation of 11%
Used vehicle inventory – Dealers had an increase in total inventory and had inflation of 37%
Our goals were to diversify dealership inventory by combining inventory pools and to capitalize on inflation. This is a strategy similar to diversifying your investment portfolio. This change in accounting worked out to be very beneficial for dealers and saved some millions of dollars in taxes.
Our one hesitation in 2021 was concern about volatile used vehicle prices. What would happen in Year 2 with used vehicles? Well, we considered simple economics, assuming that when new vehicles come back to normal levels, used vehicle prices would deflate. In that scenario, our weighted calculation of our “diversified” inventory should still be favorable, with new vehicle inventory being up and used vehicle inventory being down. Well, that is exactly what happened.
Here is what we are seeing as we finalize 2022 tax returns:
New vehicles – Dealers’ new inventory levels are back up and had 6% inflation.
Parts vehicles – This inventory had 10% inflation.
Used vehicles – Dealers’ used inventory levels did drop and did have deflation of 9%.
If you think about how this works, the weighted average used to calculate the current-year inflationary index considers the inventory values and the new, used and parts inventory indexes. With new inventory coming back (and we are seeing higher levels of new inventory than used vehicles), the calculation indicates positive indexes for the current year, which is a great result.
As you know, we like to think through things. When we changed most dealers’ accounting methods in 2021 to the IPIC method, we anticipated some drastic changes to used vehicles for the following year, but we were prepared: We knew that combining the inventory pools saved the day in 2021. Then in 2022, once again, using a combined pools method, most dealers had increases to their LIFO reserves.
About Schneider Downs Automotive Industry Group
The Schneider Downs Automotive industry group serves dealers of all sizes, from single-point locations to mega-dealerships. Our members cross departments and meet regularly to ensure efficiencies in the services provided to our clients and discuss issues, regulations and trends affecting the automotive industry.
To discuss, please reach out to Steve Barber or any of the other SD Auto Advisors. To learn more, visit our Automotive Industry Group page.
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