LIFO Accounting

LIFO Accounting

Businesses using LIFO accounting still need a resolution to the significant tax issues caused by the global interruption in vehicle production.

LIFO (last in, first out) is a longstanding inventory accounting method used by businesses to help mitigate rising inventory costs. As costs rise, LIFO is a more accurate way of measuring financial performance and calculating tax.

Due to the pandemic, significant supply chain issues, and the worldwide shortage of semiconductors, many automobile dealerships suffered significant decreases in inventories compared to previous years, and were left with no way to replenish vehicle inventories. This left many dealerships that use the LIFO method of accounting for inventory with significant LIFO recapture exposure.

Dealers using the LIFO method of accounting for inventories, in years of increasing inventory levels and prices, have benefited by being able to consider the last units acquired to be the first ones sold.

Over time, this benefit builds up as a LIFO reserve. As inventories decrease, the reserve is recaptured. Nearly all dealerships experienced major decreases in inventories during 2020 and 2021, with many experiencing upwards of a 70% loss of inventory when compared to their prior year-end. Under those circumstance, dealerships on LIFO face a significant tax burden from LIFO recapture.

The Treasury Department has existing authority (Sec. 473 of the Internal Revenue Code) to allow LIFO relief to businesses if a “major foreign trade interruption” makes inventory replacement difficult. Yet despite broad bipartisan support for Treasury’s use of its authority, Treasury declined, believing additional legislative authority is needed.

But there is strong, bipartisan and bicameral support in Congress for legislation to address supply chain and semiconductor shortages during the pandemic that severely impacted vehicle production.

Both Senate and House versions of the “Supply Chain Disruptions Relief Act” have generated broad support from significant numbers of Democrats and Republicans, and NADA is hopeful Congress will pass this technical and noncontroversial legislation to allow businesses on LIFO extended time to replace vehicle inventories as pandemic-related global disruptions and reduced auto production made it nearly impossible to replenish new vehicle supply.

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