LIFO is a tax deferment strategy widely used among U.S. businesses that regularly carry inventories of big-ticket items with rising prices, such as automobiles. A majority of the nation’s dealerships employ the method.
Dealerships on LIFO rely on the steady arrival of new-vehicle inventory to keep the deferment strategy stable. But production issues related to COVID-19 and the chip shortage greatly reduced the flow of new vehicles to dealers’ lots and, subsequently, reduced their inventories for 2021, making that long-deferred income suddenly taxable at the federal and potentially state level as regular income.
The National Automobile Dealers Association and the Alliance for Automotive Innovation, along with some Senate Democrats and a bipartisan group of U.S. representatives led by Kildee have urged the Treasury Department to grant temporary LIFO relief under Section 473 of the Internal Revenue Code, which would give dealers up to three years to restore their inventories to more normal levels.
The groups argue dealers qualify for the relief because actions related to COVID-19 by governments around the world caused “a major foreign trade interruption,” making it difficult or impossible for many dealers to replace their new-vehicle inventories.
Income tax returns were due as early as March 15 for many dealers.
“This could put a lot of them in a really bad spot,” Kildee said. “For some that are operating on thin margins, this could be a fatal blow.”
Treasury Secretary Janet Yellen has not signaled the department would provide relief.
“This is not a case where I think Treasury is antagonistic to what we’re trying to do,” Kildee said, “but that they just didn’t feel they had adequate authority under the current law because no one ever anticipated something like this happening. If we had, we would certainly have written law for it.”