July 21, 2024


Automotive to Us

LIFO relief bill a sliver of hope for car dealers

In an extreme example, Buddy Dearman, managing partner of accounting firm Dixon Hughes Goodman’s dealership practice, said one client with six stores is facing $23 million in LIFO recapture. That would equate to about $11 million in federal and state tax expense, he said.

While it’s a big deal for most dealerships on LIFO, “it’s a much more significant impact to dealers that have been around for a long time,” said Moss Adams’ Cheyney.

The LIFO recapture, too, could deplete cash flow that will be needed to invest in new-vehicle inventory once auto production normalizes.

“We’re all experiencing a good time for cash flow in the business because the cash is not invested in inventory, but as inventory levels return, dealers are going to be investing this cash … in order to get back in the game, and they need to have reserves for the investment in inventory they’re about to make,” Cheyney said.

“What’s the ripple effect of this cash event happening now on their ability to adjust to returning inventory levels in the future?” he continued, “I think that’s where we’ll really see impact, especially smaller dealers.”

To soften the blow, dealers could opt for alternative accounting methods, such as the Inventory Price Index Computation, which allows dealers to add used vehicles and parts inventories to their new-vehicle pool.

But “there’s risk to using that method because used-vehicle inventories have had an incredible amount of inflation this year,” Dearman explained. “If you elect that method, you’re stuck with it for the next five years,” and those used-vehicle values could decrease significantly over that period and potentially trigger another LIFO recapture.

Sans relief, dealership clients of Scott Lewis, firm leader of dealer services at Rosenfield & Co., are filing for extensions and preparing to pay up.

“Whatever the number is, it is what it is, and they’ll just pay it,” Lewis said. “They’re not happy about it, but they realize it is what it is, and they can just hope that something happens.”