Zero percent generates big tax bill

The sales surge sparked by 0 percent financing has been a retail boon to dealers, but hundreds of dealers nationwide face substantially larger tax bills this year if they fail to replenish their inventories by year end.

Empty lots and sharply lower year-end inventories spell trouble for dealers using an accounting method called LIFO, which stands for last-in-first-out. Some face additional taxes of $300,000 to $400,000.

"This is a real concern," said Paul Metrey, director of regulatory affairs for the National Automobile Dealers Association.

Deferring taxes

Used by more than half of the dealers nationwide, LIFO is a method of valuing inventory that offsets inventory price increases caused by inflation or periodic factory price hikes.

Using LIFO to calculate the value of inventory lets a dealer report a smaller operating profit. The result is less taxable income and lower taxes. Typically, dealers continue to defer taxes year after year until they sell the business, at which time they pay the accumulated tax.

But a sharp drop in the dollar value of year-end inventory has an effect similar to a decrease in vehicle prices - it lowers the LIFO tax benefit, which raises taxes.

"We probably do LIFO calculations for 600 (dealer) clients," said Jorg Kaltwasser, tax partner for George B. Jones and Co., a Memphis-based accounting firm. "Twenty to 30 percent will be paying higher taxes to varying degrees."

Looking for inventory

To avoid paying higher taxes, dealers must increase their inventory or ask their accountants to find an accounting strategy that offsets the additional income.

But dealers are in a bind because it is too late to order cars for delivery before Dec. 31, and inventory shortages are so widespread - particularly for General Motors dealers - that it will be difficult to perform dealer trades.

Accounting firms that serve dealers estimate 20 percent to 30 percent of the dealers who use LIFO are going to shell out taxes on at least a portion of the LIFO income they have deferred.

LIFO Systems, a Fort Worth, Texas, provider of LIFO services to 1,500 dealers, said single-point Chevrolet dealers and dealers in the Northeast face the greatest inventory shortages. Imports are in much better shape than domestic dealers, said Stanton Williams, president of LIFO Systems.

Can't find vehicles

Based on early estimates from 50 dealers, the average dealer can expect to pay about $30,000 more in taxes, Williams said. But that's an average, and there are some dealers who will be hit with a six-figure tax bill.

"If we can't find units from other dealers, it's going to hurt," said Dave Wilson, president of the Preston Automotive Group in Preston, Md., a multifranchise dealer with seven locations. Wilson's year-end inventory is down 400 units from last year. He could face a tax bill of more than $300,000.

Gardner Britt, president of Ted Britt Ford Inc., in Fairfax, Va., which sells 3,000 new vehicles a year, said he has $12 million in new-vehicle inventory, compared with $18.5 million at the same time last year. Britt, who uses LIFO, plans to meet with his accountant to try to offset the tax hit.

"We are looking to acquire automobiles," Britt said. "But there's nothing we can do about it. Nobody has cars to sell."

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