Losing LIFO Benefits – Should Dealership Owners Be Worried?

By: Chelsea Tucker

By: Chelsea Tucker

During times of inflation, the last-in/first-out (LIFO) method of valuing inventory generally results in a lower value of inventory than other methods. Dealers using the LIFO method are able to lower their income tax for a period of time, which is like having use of the money interest-free. It is not a permanent benefit, however, since LIFO benefits are lost when the business is sold or the entire inventory is otherwise liquidated. Eventually – but maybe not for many years – the benefit will be lost and the taxes saved must be paid back.

The Future of LIFO
The availability of the LIFO benefit has been threatened by proposed IRS regulations, and rumors of the “end of LIFO” have sent many dealership owners into a panic. As the federal government looks for ways to reduce the budget deficit, discontinuing the LIFO method has often been discussed as a potential source of tax revenue. In 2010, it was proposed that taxpayers currently using the LIFO method be required to recapture their LIFO inventory benefits in the first taxable year beginning after Dec. 31, 2011. The increase in gross income attributable to recapturing the LIFO reserve would be spread over eight years. During the initial phases of the drafting of the Tax Cuts and Jobs Act of 2017, it was again proposed that taxpayers currently using the LIFO method be required to recapture the benefit over a certain number of years. Because the IRS has long threatened but not acted upon ending the LIFO benefit, most taxpayers are more confident that it will stay. While the future of LIFO is uncertain, dealers should remain informed about potential legislative and regulatory changes and the impact the changes might have on their businesses.

Various trade and professional organizations are lobbying to preserve the LIFO method. The LIFO Coalition is concerned that representatives in Washington are not well-informed about the LIFO method of accounting and the effect discontinuing the method would have on taxpayers, including dealers. According to the Tax Foundation’s Taxes and Growth Model, the repeal of LIFO would end up reducing GDP by $11.66 billion and, as a result, federal tax revenue would be reduced by $518 million each year. Dealers nationwide should consider sending a letter to their U.S. senator and representative to share the impact a loss of the LIFO method would have on their business.

Dealers should consult their tax professionals to determine the potential impact LIFO termination would have on their particular circumstances. If you have any questions, please contact one of our dealership specialized accountants for additional guidance. 

Laurie Holt