With no LIFO tax help for car dealers, Congress must swoop in

In this space in February, we called for the U.S. Treasury Department to immediately invoke Section 473 of the Internal Revenue Code as a way to blunt the hit on 2021 tax bills — some in the millions of dollars — facing many dealerships that use last in, first out accounting after the semiconductor shortage reduced global auto production and depleted retailers' inventory.

Frustratingly, that call has gone unanswered.

With no action coming from Treasury as of press time — despite a campaign by the National Automobile Dealers Association and rare bipartisan support in Congress — and tax payments due Monday, April 18, U.S. Rep. Dan Kildee, D-Mich., is taking the law into his own hands.

He introduced the Supply Chain Disruptions Relief Act, which 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 as the chip shortage eases.

We appreciate Capitol Hill stepping up on behalf of the dealer community. However, if an emerging trend plays out, some of that potential tax relief could be muted.

Toyota Motor North America — currently the top-selling automaker in the U.S. — anticipates its dealers will carry less inventory long after automotive production returns to normal.

Toyota previously aimed for a days' supply of around 45, while most brands aimed for 60 to 75 — sometimes swelling beyond 100. Going forward, Toyota's goal is more like 30 days, veteran sales chief Bob Carter said this month.

There are sound reasons for this. The upside to unprecedented tight inventories in the modern era has resulted in strong profitability at automakers and their retailer partners, lower carrying costs and a drop in incentives that erode margins and brand image. Surely, others will follow Toyota's example to a certain extent — and some, such as historically lean Subaru, are already ahead of the game. However, that means dealers, at least in the medium term, might have to eat more of that LIFO recapture tax bill than they would like.

But for now, let's attend to the immediate problem: Both houses of Congress need to leverage their power over tax laws to act on the LIFO legislation and minimize the harm to auto dealers.