Year-End 2024 LIFO / Dealer Tax Update Webinar
For many years, I’ve offered mid-year and/or year-end dealer tax planning and LIFO update seminars. This year, I will not be presenting a year-end update seminar for several reasons … The IRS has not issued anything significant in the way of technical developments, and – for those of you who have listened to prior years’ seminars – you are already familiar with the tried and true, traditional year-end planning activities for LIFO inventories and dealership tax clients.
That is not to say that there won’t be any mid-year or year-end LIFO / dealer tax seminars in 2025. It just makes sense to wait and see if significant developments warranting your time and attention occur.
In the meantime, we are very busy with LIFO projections and working out planning scenarios with our dealership clients … some who are using the IPIC Method and others who are using the Alternative LIFO Method.
The most recent CPI inflation index suggests that for 2024, deflation for new and used combined vehicles will be around 2% deflation. For Alternative LIFO Method purposes, we would expect inflation rates to vary depending on manufacturer and model mix to be within a -1% (deflation) to a +1% (inflation) range.
Until we resume our LIFO/Dealer Tax Update seminars, here are three things to consider…
First, there are many planning scenarios to be considered. A dealership may be expecting significant operating losses or accelerated depreciation deductions, which may or may not be passed through to shareholders or partners. In these situations, repaying some of the LIFO reserve already build up may be a strategy to consider since net operating losses cannot be carried back and/or lower tax rates may be wasted.
Second, in other situations, for dealers that previously elected to change to the IPIC Method from using the Alternative LIFO Method, the 5-year lookback period for purposes of changing accounting methods without getting advance permission from the IRS will be expiring. These dealerships may be looking to change back to the Alt. LIFO Method from the IPIC Method, without advance IRS permission, especially if they want to take their used vehicle inventory off of LIFO.
Third and finally, a more interesting potential LIFO issue for dealers could arise sometime soon if the IRS were to take the position that for LIFO purposes, some differentiation for pooling purposes should/must be made to reflect the fact that current inventories include all manner of hybrid and/or fully-electric vehicles.
For those who have long memories or familiarity with a 50-year-old Tax Court decision involving a Ford dealer, it’s interesting to consider – in the context of dealers having more electric vehicles in their inventories – the Tax Court’s comments in that case …
“ … It would not be uncommon for many of the manufacturers of these products (i.e., cars and trucks) to be continually altering their basic product in an attempt to improve its quality or modernize its style. These modifications could be relatively minor in scope, or, on the other hand, the alterations (either viewed individually or taken collectively) could be so significant and substantial as to change completely the basic product. When the latter transformation occurs it would not be inappropriate to require the retailer or wholesaler to account for the redesigned product as a new ‘item’ of inventory with a consequential adjustment to the base-year costs of its inventory pool.
“Where, however, the modifications in a product are relatively minor in nature, it would be unreasonable to have, and, in most instances, virtually impossible to comply with, a requirement that the retailer or wholesaler annually adjusts its base-year cost to reflect these modifications. Indeed, this attention to detail is precisely the type of accounting for inventories that the dollar-value method was designed to eliminate.”
“… The point at which a modification or modifications in a product are considered so substantial as to render it a new item for LIFO inventory purpose must, of necessity, be decided on a case-by-case basis from an examination of all the relevant facts.
“… The determination of when various changes and improvements in a product are sufficiently substantial to render it a new item for dollar-value inventory purposes can only be made by examining the facts of each case.”
“… Over a period of time, an automobile or truck may undergo a number of modifications which collectively make that vehicle a different item from the vehicle in existence in the base year.”
Notice that the reference is to the base year for the LIFO election. In many cases our dealership clients have been on LIFO for over 30 or 40 years, so the comparison would involve a 30 to 40 year look-back in some cases.
Former LIFO Lookout and Dealer Tax Update subscribers know that I used to open both publications with … If you had called me persionally to ask, “What’s happening lately with dealership LIFO / IRS audits of dealers and dealerships that I need to know about?”…
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Former LIFO Lookout and Dealer Tax Update subscribers know that I used to open both publications with … If you had called me persionally to ask, “What’s happening lately with dealership LIFO / IRS audits of dealers and dealerships that I need to know about?”…
Now I invite you to follow me on LinkedIn (join our LinkedIn Dealer Tax Advisors Discussion Group) as well as here on my Will’s World Blog as I will be more regularly writing about my various thoughts on LIFO matters and dealer tax issues in the new year.
And, if you have any questions or would like to discuss a situation you’re dealing with, please feel free to call me (847-577-3977, ext. 101) or email me at will@defilipps.com.
Regards,
Will
READ MOREAuto Dealer LIFO – Conformity Warning & IPIC Estimates
Like kids waiting for Santa Claus to come down the chimney on Christmas Eve, we’re waiting for the BLS to release the CPI inflation index for auto dealers for December.
Based on projections we’ve done for many, many IPIC LIFO dealerships reflecting estimates (of course), we’re finding inflation rates up to 5% and deflation rates as low as 2.5%, all depending on the mix of new, used and parts dollars in the projected inventory level.
Let us know if your estimates don’t fall within this range.
Incidentally, we’ve been informed that one 20 Group administrator has asked dealerships to not include a LIFO adjustment on their year-end December statement when it is sent in for composite analysis. We strongly disagree with their suggestion. We fear that any year-end statement – even for this purpose -¬ would violate the conformity requirement and be fatal to the LIFO election if a good-faith estimate is not reflected on that year-end statement.
Beware if you are tempted in this direction. If they have to take the LIFO adjustment out in order to prepare dealership composites, I think that’s out of your hands. But, if you make it easier for them by not reflecting the LIFO adjustment in the year-end statement, then my opinion is that you have violated the LIFO conformity requirement.
Happy New Year!
~ Will De Filipps
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