Page 18 - On The Move 18-4

By Adam Neporadny
Managing Director,
DHG Dealerships

ost automobile dealerships value at least some part of their inventory
Musing the Last-In-First-Out (LIFO) accounting method. In periods of
rising prices and stable inventory levels, LIFO usually results in a deferral
of income by way of an increase in cost of goods sold. When prices are
falling and/or inventory levels decline, the opposite can happen – that de-
ferral of income reverses. This is known as LIFO recapture. Historically low
levels of inventory brought on by the COVID-19 pandemic, subsequent
recovery of demand and now chip shortages, coupled with the potential
that low levels may persist through the end of 2021, are a potential threat
for LIFO recapture this tax year. Depending on the magnitude of the in-
ventory decrease from 2020 to 2021, this recapture could be significant.
To prepare for this possible recapture, dealers can start modeling now to
assess the materiality of the issue and their specific situation.

During the onset of COVID-19 pandemic, consumers were not buying new
vehicles nor were they trading in old ones, so the market saw concurrent
suppressed demand and supply in the dealership industry. At the same
time, demand for consumer electronics swelled, and chip producers re-
allocated production to fill that need. Now that the U.S. economy is re-
bounding, and shoppers are heading back to dealerships, the reallocation
of production back to automotive supply chains is sluggish. Additional re-
cent setbacks include a power outage, a production pause, and a fire at
various chip manufacturing plants. The fragility of the supply chain contin-
ues to plague dealerships. It is also possible that a long-term reliance on
outdated technology was triggered at the onset of the pandemic.

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