As new vehicle inventories dwindled with the onset of the pandemic – and fell through the floor because of the persistent microchip shortage – NADA has been fighting for dealers who rely on the Last-In, First-Out (LIFO) accounting method for their new vehicle inventories and now face significant “LIFO recapture.” Dealers on LIFO with ongoing inventory shortages will face higher income taxes, through no fault of their own, which will strip working capital out of dealerships that are so important to the local communities they support during the economic recovery. I want to update you on our extensive and ongoing advocacy efforts to obtain LIFO relief as well as highlight some planning strategies under current law that could potentially mitigate LIFO recapture for some dealers.
NADA launched an initiative for LIFO relief in November 2020, because of the effect the pandemic was having on new vehicle inventories. NADA petitioned the Department of the Treasury to use authority under a never-before-used section of the Internal Revenue Code (section 473) to grant LIFO relief when it is difficult or impossible for a taxpayer to replace its inventory due to a “major foreign trade interruption.” NADA has met with Treasury four times in the past year, coordinated its advocacy with the American Institute of Certified Public Accountants (AICPA) and other industry groups, and provided data demonstrating the relationship between the pandemic and the unprecedented nature of the inventory decline, but Treasury has failed to act on our petition.
Fortunately, Congress has engaged in bipartisan efforts to convince Treasury to grant regulatory relief. In November 2021, 20 Senate Democrats sent a letter and 92 Democrat and Republican Representatives sent another letter to Treasury Secretary Yellen urging her to issue LIFO relief under Section 473. The NADA grassroots network was instrumental in generating constituent support for these letters.
So why has Treasury failed to act? Treasury explained in a recent letter to Congress that to obtain LIFO relief, “businesses with global supply chains would need to demonstrate to the Secretary of the Treasury… that the decrease in the closing inventory… is directly and primarily attributable to the foreign disruption in the supply chain.” Treasury now has the facts demonstrating that dealers have met this condition.
The Alliance of Automotive Innovators backed up our LIFO request with a letter to Treasury documenting that the unavailability of foreign microchips has delayed or reduced OEM production and prevented the OEMs from sending dealers the necessary vehicles to replenish inventory. NADA followed up with a letter to Treasury on January 24 explaining that Treasury’s condition for relief has been met and that Treasury should promptly grant LIFO relief to dealers in advance of the filing deadline for their 2021 tax returns.
On February 4, 2022, Senate Democrats (19 signers of the first letter) sent a second, stronger letter to Secretary Yellen urging her to grant LIFO relief no later than February 15, 2022. When Treasury did not act, 32 Senate Republicans sent a similar letter on February 18. I want to thank the many dealers and ATAEs who have urged their Senators to sign these letters.
It’s now up to Treasury to act. This extraordinary congressional support for LIFO relief is important to NADA’s regulatory advocacy, but also will be important if we need to quickly seek a legislative solution. We will provide more details with targeted legislative calls to action as warranted.
NADA has also been working with dealer accountants to highlight potential LIFO recapture and the adverse tax consequences to dealers. While there is no “silver bullet” to avoiding these consequences under current law, there are potential ways to help mitigate them. The accounting firm Crowe explained this in an info sheet that NADA sent to all dealers last November and during a webinar NADA hosted last December. Now, in a more specific info sheet, Crowe addresses the positive benefits that could flow from changing to the Inventory Price Index Computation (IPIC) Accounting method for some dealers. This change would allow dealers on LIFO to combine their new, used, and parts inventories, which could be advantageous depending on a dealer’s specific circumstances. However, NADA urges you to work closely with your tax advisors as mitigating LIFO recapture depends on a taxpayer’s individual facts and circumstances.
Rest assured that LIFO relief has been a top priority for NADA for more than a year, and we will keep you informed about our ongoing advocacy initiatives. We will continue to seek temporary deferral of LIFO recapture over a three-year timeframe to provide dealers an opportunity to replenish inventory during a normal business cycle. Now is not the time to take working capital out of our dealerships because as major employers, generators of significant tax revenue and vital contributors to local communities you need to continue to lead the economic recovery.
Thank you for your support of NADA!