Buddy Dearman, managing partner of accounting firm Dixon Hughes Goodman’s dealership practise, stated that one client with six locations faces a $23 million LIFO recapture. This would cost around $11 million in federal and state taxes, he added.
While it is a substantial change for the majority of dealerships on LIFO, “it has a far greater impact for dealers that have been in business for a long period of time,” according to Cheyney of Moss Adams.
Additionally, the LIFO recapture could decrease cash flow required to invest in new vehicle inventories once auto production returns to normal.
“We’re all having a good time for cash flow in the business right now because the cash is not being invested in inventory, but as inventory levels recover, dealers will be investing this cash… in order to get back in the game, and they’ll need reserves for the inventory investment they’re about to make,” Cheyney explained.
“How will this cash event affect their capacity to respond to recovering inventory levels in the future?” he continued, “I believe that is where we will see the most impact, particularly smaller dealers.”
To mitigate the blow, dealers can employ alternate accounting procedures such as Inventory Price Index Computation, which enables dealers to incorporate used vehicles and parts inventories into their new vehicle pool.
However, “there is a risk associated with that strategy,” Dearman added, “since used-vehicle inventories have experienced an enormous degree of inflation this year.” “If you choose that strategy, you are committed to it for the next five years,” and those used-vehicle prices may fall dramatically during that time span, triggering another LIFO recapture.
Without respite, dealership clients of Scott Lewis, Rosenfield & Co.’s firm leader of dealer services, are filing for extensions and preparing to pay up.
“Whatever the figure is, it is what it is, and they will just pay,” Lewis stated. “They’re not thrilled about it, but they understand that it is what it is, and they can only hope for the best.”