Where is the LIFO Inventory Relief?
Ryan McDonell Manager, CPA
26 July 2022
Many auto dealers use the last-in first-out (LIFO) accounting method for valuing new vehicle inventory. Under LIFO, dealers use the value of the most recently acquired inventory as an expense against income from vehicle sales. Ordinarily, when dealers can replace inventory as they sell it, this inventory method does not cause any issues. However, because of the COVID-induced global supply chain issues and semiconductor shortages, auto dealers have found it particularly difficult to replace new vehicle inventory in 2020 and 2021. The inability to replace inventory means that dealers have had to liquidate older low-cost LIFO layers and face large amounts of income which would have otherwise been deferred.
Internal Revenue Code Section 473 allows a taxpayer using LIFO to avoid picking up income in a liquidation year if an inventory liquidation is attributable to a qualified inventory interruption. Qualified inventory interruptions include major foreign trade interruptions that make it difficult or impossible to replace inventory – which, arguably, includes the global supply chain issues brought on by COVID. Taxpayers cannot utilize this code section unless the Secretary of Treasury publishes a notice in the Federal Register determining that a qualified inventory interruption has occurred. At the time of writing, the Treasury has yet to publish such a notice, which means that dealers have not been able to utilize Section 473 relief. Despite letters from both chambers of Congress, as well as NADA, Auto Innovators, the AICPA, and more requesting relief, Treasury has been reluctant to grant Section 473 relief, and instead it appears that authorization will have to be done via legislation.
Such legislation was introduced in April of 2022 – the bipartisan Supply Chain Disruptions Relief Act (H.R. 7382 in the House, and S.4105 Senate counterpart) which would allow new motor vehicle dealers to elect to wait until the end of 2025 to replace their inventory for purposes of determining income related to the sale of LIFO inventory during 2020 and 2021. The bill would allow dealers to make a prospective change in accounting method by making a Section 481(a) adjustment in the first taxable year after the law is enacted instead of having to amend previously filed returns. However, since these bills were introduced, there has not been any movement to pass these bills standalone. It is difficult to predict whether these bills will end up as part of a larger legislative package or if efforts to receive Section 473 relief have been in vain – we will have to wait and see.