LIFO Relief Appears Unlikely: IPIC Remains an Option
LIFO Relief Appears Unlikely: Options are Available to Mitigate Tax Burdens
Dealerships are painfully aware of the lack of new vehicle inventory. With that causing numerous problems up and down the line, LIFO recapture and a potential, significant tax burden in 2021 is just another issue from inventory problems.
As we reach the middle of July, it appears that unless there is a last-minute addition to a current bill, Congress will not provide auto dealers with LIFO relief for 2021. With the September 15 tax due date approaching, it’s time to look at other options.
IPIC to the Rescue?
The Inventory Price Index Computation (IPIC) method uses consumer or producer price index to determine inflation instead of the actual invoice prices of inventory.
Why is that good for dealerships? It combines new and used vehicles plus parts into a single LIFO calculation. Thus, with a steep new car inventory decline, expanding the LIFO pool might help offset the new vehicle decreases.
How does this impact my dealership?
When using the IPIC LIFO method, Form 3115 is filed to change to the IPIC method for all LIFO inventory and to combine LIFO pooling. IPIC inflation rates for 2021 are close to 30% which often has dealers getting a LIFO deduction for 2021, rather than recapturing significant income under the alternative LIFO method.
One other option is to ditch the LIFO method altogether and file for an accounting method change. The benefit is the ability to defer the income recognition and the payment of the tax over a four-year timeframe instead of the current year LIFO recapture. There is a catch. If you elect away from LIFO, you may not re-elect the LIFO accounting method for five years.
This is not an easy decision and multiple variables impact the best course of action. It is smart to have a review done of year-end inventory and discuss what that impact looks like on your LIFO reserve and your taxable income.
