Dealerships Using the CPI/IPIC LIFO Method … Beware: For 2024, CPI Produces Deflation & LIFO Reserve Reductions

 In Will's blog

By now most dealership CPAs are involved with finalizing year-end inventory LIFO calculations and complying with the restrictive financial statement reporting requirements imposed on dealerships using LIFO.

Recently, many of our LIFO clients have asked us for projections of the expected LIFO reserve changes because they were under time pressure to issue financial statements to manufacturers or other lenders and shareholders before the final LIFO calculations could be completed.

For the IPIC (Inventory Price Index Computation) LIFO pool, the estimated deflation rate for the year was determined by weighting of the dollars in the respective inventory categories using the price change information (i.e., inflation or deflation rates) published by the Bureau of Labor Statistics for the 12-month period Dec. 1, 2023 through November 30, 2024. To this, we factored in an estimate for the change for the month of December because the actual amount of inflation or deflation for the month of December was not published until mid-January, 2025.

The inflation or deflation rate computed for the pool was calculated by weighting the dollar amounts of the classes of the inventory included in the pool (i.e., new cars, new light-duty trucks, used vehicles, parts and tires) after applying appropriate BLS/CPI inflation/deflation information for the inventory categories.

After computing the weighted inflation/deflation rate for the pool, we rounded that result up or down to either the nearest ½ percent or 1 percent. Our software then prepared detailed schedules showing 2023 actual results with results expected if the deflation rate for the pool is either ½ or 1 percentage point greater or less than the estimated weighted index for the pool.

Detailed projections were prepared for our LIFO clients based on the dealership’s (1) LIFO layer valuation history which reflects the total dollars of inventory in the single LIFO pool, (2) the expression of that inventory in terms of base dollars, (3) the cumulative inflation experience over the life of the IPIC election and (4) the changes made to use the IPIC Method to value those inventories.

The results of our projected IPIC pool indexes ranged from ½% to 2% deflation. These were reflected in the dealership’s preliminary year-end financial statements for 2024. Given the multiple variation factors involved (i.e., inventory levels for each classification of goods in the IPIC pool and multiple individual inflation/deflation rates computed by the BLS for each component), most clients simply rounded the result produced by our calculations for the change in the LIFO reserve at year-end to the nearest $1,000.

On January 15, the Bureau of Labor Statistics released the Consumer Price Index Report containing multiple indexes reflecting deflation for the major inventory classifications involved in IPIC pools.

  • Table A in the CPI News Release (USDL-25-0021) reflected 0.4% deflation for new vehicles and 3.3% deflation of used cars and trucks.
  • Table 3 reflected a general category “new and used motor vehicles” with -1.3% deflation.
  • Indexes for specific Series IDs (U.S. city average, all urban consumers, not seasonally adjusted):
    • Deflation for New Cars: -0.7% … New Trucks: -0.3% … Used Cars & Trucks: -3.3%
    • Inflation for Vehicle Parts & Equipment: 1.8% … Tires: 1.2%

This final information for 2024 from the BLS resulted in most dealerships having decreases in their final LIFO reserve calculations. Most dealerships had inventory levels higher at the end of 2024 than last year, and their LIFO calculations reflect “increments” …or slight decrements … in base dollar amounts with corresponding decreases in their LIFO reserves due to the deflationary pool indexes.

The year-end LIFO financial statement conformity rules require a dealership to reflect an estimate (or the actual amount, when computed) of the change in the year end LIFO reserve on the last income statement for the year issued to the manufacturer(s) and/or to the floorplan lender(s) and other lending institutions, creditors or shareholders.

All preliminary dealership year-end financial statements sent to the manufacturer(s) and/or to the floorplan lender(s) should reflect a best efforts estimate. The final (13th) year-end statement should reflect an adjustment of the estimated amount to the actual computed year-end LIFO reserve amount.

Dealerships previously reflecting an estimate of the LIFO reserve change on preliminary year-end financial statements should adjust the difference between the actual and the projected amounts as a net charge against 2024 income on all “final” income statements issued for 2024. Note: The adjustment should not be run through the 2025 financial statements.

The position of the IRS is that if all of these financial statement conformity requirements are not fully satisfied, the IRS Commissioner has the discretion to take action that could result in the termination or loss of the dealership’s entire LIFO election and reserves.

Final Thoughts

  1. Very few dealerships are likely to be reporting inflation indexes if they are using the IPIC method for 2024. Just because there is deflation in the ending inventory and therefore no increase in the LIFO reserve, that does not mean that an estimate of the change is unnecessary.
  2. In most cases, LIFO reserve decreases for 2024 will primarily be due to the deflation experienced. If there is a properly calculated decrement, the carryback of that decrement against an increment in 2023 will result in no payback of the LIFO reserve.
  3. As a result of adjusting the contributions to the LIFO reserve of pre-2024 LIFO layers, these layers should reflect negative contributions to the LIFO reserve. As a result, at year-end 2025, if there is a carryback against pre-2024 layers, that carryback will result in an increase in the LIFO reserve, rather than a decrease. Be careful in analyzing and explaining the effect of deflation and negative contributions to the LIFO reserve.
  4. Dealerships using the Alternative LIFO Method (instead of the IPIC Method) to value their new vehicle inventories are likely to reflect very small … probably not greater than 1% or 2% … inflation indexes for their 2024 ending inventories. Some Alt. LIFO inflation indexes for 2024 may be negative, depending on the make.
  5. Any dealership considering electing LIFO for 2024, should probably not elect LIFO this year.

Willard J. De Filipps, CPA   (Jan. 21, 2025)

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