This longstanding accounting practice LIFO (“last in, first out”) is an inventory accounting method used by companies to help mitigate the impact of inflation. LIFO allows companies to calculate their income by basing sales on the newest inventory for goods, such as vehicles and parts, which increase in price over time. NADA supports preserving LIFO, as its repeal would result in a substantial tax increase on dealerships and would strip dealers of working capital, making it harder to create jobs.
A significant percentage of automobile dealerships currently use the LIFO accounting method for their new vehicle inventory since it better matches the cost of goods sold to the cost of replacing inventory. LIFO is a legitimate accounting method that has been in place for over 70 years. Dealerships may not change between LIFO and FIFO (“first in, first out”) without approval of the Internal Revenue Service. Dealerships assume the risk of artificially increased tax liability if inventory costs should fall once they elect to use the LIFO method.
Some Members of Congress seek to repeal LIFO as a revenue raiser to offset the cost of other tax priorities and not because the underlying tax policy for LIFO is flawed. However, LIFO repeal would cause collateral damage to other sectors of the economy, including small business automobile dealers.
• Repealing LIFO would force dealers currently using the accounting method to report their LIFO reserves as ordinary income, resulting in a substantial tax increase for many small businesses and family dealerships.
• LIFO repeal is tantamount to a retroactive tax increase and the government changing the rules in the middle of the game to the detriment of America’s auto dealers, and many other small businesses.
• Repealing LIFO could threaten the viability of many dealers, and would take cash away from maintaining and creating jobs.
For consideration in early 2014, Sen. Max Baucus, D-Mont., proposed language that would eliminate LIFO and permit reserves to be paid off over eight years. Members of Congress are urged to oppose the repeal of LIFO as it would be a tax hike on many small businesses.