House Democrat introduces bipartisan bill to provide LIFO tax relief to car dealerships

WASHINGTON — U.S. Rep. Dan Kildee on Monday plans to introduce legislation that would provide tax relief to dealerships that use the "last in, first out" inventory accounting method and have struggled to maintain inventory levels because of the global semiconductor chip shortage.

The bill would allow dealerships to wait until as late as 2025 for their inventories to be replaced to determine the income attributable to the sale of inventory during 2020 or 2021, giving dealers time to restock their inventories as the chip shortage eases and auto production returns to pre-pandemic levels.

"This is an anomaly. It's an unexpected, unplanned-for event that was out of the control of any of these dealerships," Kildee, a Michigan Democrat, told Automotive News. "We can accommodate that by allowing them additional years to replenish inventory and avoid a big tax event that the federal government never would have expected, nor would they, had it not been for this chip shortage."

Jodey Arrington, a Texas Republican, also is supporting the bill, which is specifically targeted to the auto industry.

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 dealership lots and, subsequently, reduced dealers' 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 that 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 that 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."