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Requests have been made to the Department of Treasury (Treasury) and
the Internal Revenue Service (IRS) to consider a LIFO “Holiday” to post-
pone LIFO recapture until inventory levels return to normal levels. Orga-
nizations like the National Automobile Dealers Association (NADA) are
advocating for LIFO relief policies, specifically asking for Internal Reve-
nue Code Section 473 relief by arguing that the COVID-19 pandemic has
caused a qualified inventory interruption. Under Section 473, taxpayers
would not recognize income attributable to the liquidation of LIFO layers
if the inventory is completely replaced by the end of a replacement period.
While there has been no traction from these requests to date, hope still
remains, and it seems the advisable action is to continue this conversation
within the industry.

An inventory reduction will affect LIFO reserves based upon the history
of inventory levels and inflation as well as the current level of inflation.
This will vary from dealer to dealer, manufacturer to manufacturer and
the mix of cars versus trucks, as trucks trend more inflationary than cars.
New vehicle industry data from June 2021 shows Alfa Romeo, Chevrolet
cars, Ram trucks and Infiniti trucks/SUVs are at the top of the inflationary
charts with Volvo trucks/SUVs and Lincoln, Jaguar and Buick cars holding
at the bottom at around 1.00, zero inflation/deflation. Newer dealerships
with less layer history have trended somewhat better than those with a
long layer history dating back decades, so keep in mind that a decrease in
inventory does not necessarily equate to LIFO recapture. The current year
inflation and the cumulative LIFO index play major roles in the calculation.
Used vehicle LIFO pools continue to fare well, with surging used prices
driving inflation to record levels. June industry data shows inflation in the
used market of approximately 20 percent; however, there are signs that
used vehicle price hikes may be dropping soon and those levels of infla-
tion could be much different by year-end.

Dealers should consider modeling minimum inventory levels and esti-
mates of their LIFO layers starting in October. With only two months to
year-end, this will be appropriate timing to minimize inflation fluctuations
that would affect the calculations and still allow time to implement plan-
ning. A minimum inventory level can give dealers the estimated point at
which minimum deduction or income may result from valuing their in-
ventory at LIFO, and an estimate calculation can provide dealers an ap-
proximation of deduction or income resulting from a change in the LIFO
reserve.

For dealers facing significant LIFO recapture, there are a few options to
consider. Some accounting method options or changes to one’s year-end
could be explored to possibly lessen the impact. However, these options
are very fact-specific and may not be available to everyone. A change
from alternative LIFO to IPIC LIFO may be a viable solution where new ve-
hicles are pooled with used vehicles and parts, spreading out the effects
and softening the blow. However, IPIC may only be a short-term solution,
since the Producer Price Index (PPI) and Consumer Price Index (CPI)
used in the IPIC method historically produce lower inflation indexes and,
in turn, potentially less future benefit. Changing from alternative LIFO to
IPIC LIFO requires a Form 3115. If none of these options are right for you,
and LIFO recapture is imminent, there is some consolation in that dealers
could be paying less taxes on the recapture now if tax rates will be higher
in future years.

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