WASHINGTON — With record-low levels of new-vehicle supply and no near-term fix for replenishment, most dealerships using the "last in, first out" inventory accounting method now face significant tax burdens, and the deadline to pay up is fast approaching.
Businesses on LIFO — a tax deferment strategy used by about half of the nation's new-vehicle dealerships — must maintain a sufficient level of inventory at year end to avoid triggering a potentially large income tax bill.
But production issues related to COVID-19 and the microchip shortage greatly reduced the flow of new vehicles to dealership lots and curtailed inventories starting in 2020 and worsening in 2021. That made the long-deferred income suddenly taxable at federal and state levels.
For some dealers, the LIFO recapture has led to additional tax payments from $100,000 to $2 million or more, and those bills are due in less than two weeks for dealerships structured as pass-through entities or C corporations.
"Whether they file an extension or don't file an extension, they still have to pay the tax by April 18," said Dan Cheyney, national practice leader of the automotive and dealer services group at accounting firm Moss Adams. "The urgency is very real."
Despite a barrage of fruitless attempts by the National Automobile Dealers Association, a bipartisan group of U.S. lawmakers and others to persuade the Treasury Department to activate a never-before-used provision, known as Section 473, in the nation's tax code that could provide relief to dealers, a sliver of hope remains.