LIFO tax relief for car dealers: No response from Treasury

WASHINGTON — A coalition of dealers, automakers and legislators remained waiting for a response last week from the U.S. Treasury Department on whether it would grant relief to certain dealers facing potentially large tax bills this spring.

In a letter sent Feb. 4 to Treasury Secretary Janet Yellen, 19 Senate Democrats set a Feb. 15 deadline for the department to activate a never-before-used provision that would provide temporary relief to retailers, including dealerships, that employ the "last in, first out" inventory accounting method.

Income tax returns are due as early as March 15 for many dealers.

As of press time Friday, Feb. 18, Yellen had not responded to the request from the senators or issued a notice in the Federal Register — the first step in granting the relief. A Senate congressional aide said the staff will follow up with the Biden administration.

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 the Senate Democrats and a bipartisan group of U.S. representatives, 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.