The COVID-19 pandemic has completely disrupted supply chains around the world for nearly every business, including automotive dealers, which are experiencing a huge inventory crunch that has impacted their ability to acquire inventory, while customer demand remains high.
The American Institute of CPAs (AICPA) is asking the Internal Revenue Service to help automotive dealers who have been unable to maintain inventory due to the pandemic.
The AICPA requested relief under Section 473 for qualified taxpayers that (1) use the last-in, first-out (LIFO) method of accounting for inventory and (2) that have experienced a decrease in their ending inventory because of the ongoing pandemic. For taxpayers that account for their inventory under LIFO valuation methodology, when inventory levels significantly decrease, the previous years’ layers are liquidated, and the taxpayer must then recognize income. Section 473 relief would allow a qualified taxpayer to replace the inventory over a three-year “replacement period,” thus decreasing the significant tax liabilities that most automotive dealers are experiencing relative to the inventory shortage.
Under Section 473 relief, taxpayers would make an election on their timely filed federal income tax return for the first tax year following the LIFO layer liquidation year. For most dealers, this election statement would be made on their 2021 income tax returns, unless they elect a new safe harbor method. The AICPA recommended a new safe harbor method, which would allow a qualified taxpayer to disregard the LIFO layer liquidation year and retain the LIFO layers relative to the beginning inventory balances of the liquidation year. If the taxpayer increases its inventory balances to pre-COVID levels by the end of the replacement period, no income will need to be recognized on the liquidated layers.
In instances where a dealer’s income tax return has already been filed for the liquidation year, the AICPA letter requests that the taxpayer be able to make a late election by filing an amended return within 90 days of IRS guidance being published, or by filing a Form 3115 Application for Change in Accounting Method with its 2021 income tax return.
Schneider Downs Automotive Services Group will continue to monitor guidance relative to potential inventory tax relief. If your dealership has experienced an inventory disruption and you would like to discuss this issue further, please contact any of our tax advisors.
