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Last-In-First-Out (“LIFO”) is something that all auto dealers have talked about at some point over the last 20 months. With new vehicle inventory levels down, the assumption is that some, if not most, of a dealer’s LIFO reserve is going to be recaptured on your 2021 financial statements and tax returns. That means more tax due come April 15.
The concept of LIFO has been great for the automotive industry. We look at it as an interest-free loan from the government. For example, your truck inventory might be recorded on your books at 1980 prices, which means you have accelerated your expenses. That is a good thing for you since less tax paid to date has helped the cash flow of your business. LIFO ultimately has allowed dealers to expand, stay in business through downturns or meet other financial goals. But now with the new vehicle inventory level being very low, a LIFO recapture is more likely to happen, and much of that cash tax savings is going to be paid back… OR IS IT?
We have found a lot of success working with our dealership relationships regarding use of the Inventory Price Index Computation (“IPIC”) method of calculating your LIFO reserve instead of the historical industry standard of the Alternative LIFO method we are accustomed to. Here are some things to think about if considering the IPIC LIFO accounting method change:
If you have not yet considered using IPIC for 2021, it is not too late! This LIFO accounting method change can be made up to the due date of filing your 2021 tax return, including extension.
Let’s talk about real results. Due to low year-end new vehicle inventory levels, we saw 75% of a dealer’s LIFO reserve being recaptured in 2021 using the Alternative LIFO method. This same dealership increased its 2021 LIFO reserve by 30% by using the IPIC method. Once again, to think this through, let’s look at the 2022 LIFO calculation too.
We know many dealers have liquidity right now. So, you might ask: why not just pay the LIFO recapture tax due and get part of the monkey off your back? Our response is why?! Don’t you like interest-free money? With the liquidity that dealers have now, it is a good time to expand and/or diversify portfolios. Liquidity within a dealership is not normal, since it takes much capital to run the business. For the first time as a dealer owner, there is excess cash. Let’s do something other than pay tax (at least for today).