Global inventory shortages could lead to increased tax bills for LIFO businesses
Published March 3, 2022
Although we are pleased to see many improvements in our communities since the onset of the COVID-19 pandemic, auto dealers and other industry-heavy businesses continue to face challenges. These businesses commonly use a tax deferment strategy known as LIFO, or last-in first-out, designed for organizations with high-ticket inventory that run with expectations that the newest inventory on the lot will be the most desired to purchase by their customers.
One crucial catch to the LIFO accounting strategy—businesses must meet specific inventory targets to allow tax deferment.
Major tax implications are on the horizon for LIFO businesses this tax season as global supply disruptions caused by COVID-19 continue. As these businesses experience reductions in inventory due to the continued chip shortage, the potential for triggering a LIFO recapture tax increase, as they cannot maintain the required minimum levels of inventory—a problem caused by circumstances beyond their control.
Without relief granted by the U.S. Treasury Department, LIFO businesses could step into the 2022 income tax return deadline with debilitating tax bills. In February, relief was requested from both sides of the aisle. A group of 19 Senate Democrats, as well as a group of 32 Senate Republicans, sent letters to Treasury Secretary Janet Yellen requesting activation of Section 473 of the Internal Revenue Code, a tax provision to provide temporary relief to these businesses. Still, as of March 1, Yellen has not responded to the requests.
The letter sent by Senate Republicans, led by Tim Scott, reads, “As the country continues to confront severe supply-chain disruptions, we write to express strong concerns that the Treasury Department has yet to use its existing authority to provide timely relief to auto retailers using the last-in, first-out (LIFO) method of inventory accounting. Treasury’s inaction comes despite the unprecedented pandemic-related interruption of global supply chains that is severely curtailing vehicle production due to the ongoing shortage of semiconductors.”
The clock is ticking on the upcoming tax season, and if the tax provision were to be enacted, auto dealers could be allowed up to three years to stabilize their inventory and prevent these major tax hits. Unfortunately, this relief is looking less likely as time progresses. We will continue to update you as we learn more.
If you want more information on LIFO tax implications and how they may affect your organization, contact MCM Tax Partner Scott Herman at firstname.lastname@example.org.