While today may just seem like another Tuesday to you, dealers across the country are going to be on edge this particular Tuesday because it’s the deadline for an important piece of legislation that could affect those said dealers. Really, dealers are hoping for a little help from the Senate with some antiquated laws so they can avoid this year’s guaranteed large-figured tax bills heading their way.
Here’s the problem: dealers have been short on inventory. We all know that it’s due to the chip shortage because of the pandemic. While the lack of inventory may be hurting consumers in the form of markups and high prices, it’s hurting dealers too.
It all has to do with a basic accounting method called LIFO or “last in, first out.” If you’re unfamiliar, LIFO means that products that have been produced more recently are the ones that are sold first. Businesses will use this as a way to defer their taxes. But therein lies the problem. From Automotive News:
LIFO’s basic design relies on a continual flow of inventory to keep the deferment afloat, often for years and even decades. Stop the flow of new vehicles and sell off much of what’s left, which happened at dealerships in 2021, and a mountain of past-tax deferments come due at once.
With inventories low, dealers are scrambling. Many heads have come together to figure out something before the tax bills come due: the National Automobile Dealers Association, Alliance for Automotive Innovation and a group of 19 bipartisan Senators are actually working together to save these businesses from their “hardship.”
Everything hinges on vaguely worded phasing from section 473 of the Internal Revenue Code written in the 1980s. Two of the three sections make sense, but the third, not so much:
The third was much more vague: a “major foreign trade interruption.” It was so ill-defined that in the intervening decades, which have seen major wars, terrorist attacks, a near collapse of the global economy and seven presidencies, it’s never been triggered. But those four previously unused words perfectly describe what happened to the global auto industry last year because of its worldwide supply disruptions and issues with COVID-19, according to NADA and its allies on the issue.
Using this phrasing, dealers are hoping that the chip shortage and its resulting disruption to the supply chain, as well as dealer inventories, will result in a paused tax bill. Senators are attempting to make all of this more palatable to the public by calling these dealerships “small businesses” and “mom and pop dealers.”
Regardless, if the action fails, many dealers will just have to face those big tax bills, like one Iowa owner of a Toyota and Honda store, John Hosmer, who expects to have a six-figure bill:
Hosmer, a former certified public accountant himself, now faces having to declare — and pay the requisite federal and state income taxes — on “six figures” of pent-up income this year from LIFO because his inventories dwindled to almost nothing in 2021. His two dealerships combined sold 519 new vehicles last year, about a hundred fewer than normal.