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What business and nonprofit leaders need today is savvy and sensible guidance so they can make intelligent financial decisions that help their organizations thrive. Join Albin, Randall & Bennett’s pragmatic and experienced CPAs as we share forward-looking ideas about the topics critical to your organization’s financial health, well-being and growth.

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Last In First Out (LIFO): Accounting for Dealership Inventory

“A vast majority of our dealership clients use LIFO because they are matching inventory costs to revenue. Newer vehicles often carry a higher price tag than older models. So dealerships use the LIFO method to show a higher cost of goods sold and reduce their taxable income.”

The last in first out (LIFO) method of accounting for dealership inventory is a hot topic these days. In this episode of Savvy & Sensible, Holly Ferguson and Matt Pore provide auto dealers with details about the LIFO method, including issues related to today’s environment, possible solutions, and the auto industry’s response.

Using the LIFO method of accounting for inventory allows auto dealers to match inventory costs to revenue. Newer vehicles often carry a higher price tag than older models, so dealerships use the LIFO method to show a higher cost of goods sold and reduce their taxable income. As client inventories grow year over year, they create LIFO layers. And at the end of every year, there would be an analysis of their LIFO inventory to determine if there’s either an increment or a decrement to their LIFO reserve, which takes into account current inventory levels, product mix, and inflationary index. 

The issue in today’s environment is that, in the current market, auto dealers have seen a significant decline in their inventories due to strong sales years and, now, hard-to-access new inventory from the manufacturers. A decline in the inventory levels will have an impact on the LIFO reserve and likely cause phantom taxable income. 

Section 199(a) of the Tax Cuts and Jobs Act (TCJA) of 2017 created a pass-through deduction in which any income recognized from a decline in the LIFO reserve will be taxed at the highest federal tax rate of 29.6%, which is 80% of the highest rate of 37%. So, from a tax perspective, it may not be a bad year to pay taxes. In previous years, when clients were increasing their inventory and creating their LIFO layers, they were getting deductions at the highest rate of 39.6%. Now, they’re recognizing income at lower tax rates.

Filing a change of accounting method to elect off of LIFO could provide some relief to dealerships with significant declines in inventory levels this year. The dealership will be required to recognize their LIFO reserve as taxable income through a section 481(a) adjustment. If the unfavorable adjustment is greater than $50,000, the dealer will be required to recognize the income over four years, which means you could be deferring the income into a year with a higher tax rate. Once the election has been made, a dealership may not elect back on LIFO for five years.

The Treasury has historically provided LIFO relief to other industries (pursuant to Section 473), under which businesses that had an interruption in their ability to obtain replacement inventory to a trade embargo or other international event were granted three additional years to replenish the liquidated inventory. The National Automobile Dealers Association (NADA) has been meeting with The Treasury in an effort to persuade them to grant similar relief to dealers with LIFO problems. But we won’t see any movement with NADA and The Treasury before April, so dealers need to discuss how they’re gonna handle the issue now. 

We’re Here To Help

ARB’s Auto Dealership Tax & Advisory Services Team is well versed in the issue. We are happy to walk you through the issue and help you consider all of your options. If you have any questions, contact Matt Pore today.

New Leasing Standards: What Business Owners Need to Know

“[] The balance sheet will look a bit different. Other than that, what is the impact to companies? It’s actually pretty huge – not so much from a financial statement perspective, but the actual administrative burden that they have to now take on. There’s a fair amount of accounting involved with figuring out what the value is of those leases.”

The new leasing standards came out in 2016, so the topic has been on the table for several years now. But implementation is finally here. In this episode of Savvy & Sensible, Albin, Randall & Bennett (ARB) principal, David Jean, and ARB senior audit manager, Gisele Couturier, discuss the new standards, the implementation timeline, and how business owners can prepare for a smooth transition.

For non-public companies, the new leasing standards are effective for fiscal year ends beginning after December 15, 2021. For calendar year companies, that means the new standards became effective on January 1, 2022. Under the new standards, operating leases, which were previously only disclosed in the footnotes, move to the balance sheet as a right-of-use asset with an offsetting lease liability. The new standards extend to related-party leases. However, short-term leases, which (for this purpose) are those with terms of 12 months or less and no renewal options, do not have to be capitalized on the balance sheet.

Implementing the new leasing standards can be complex. Determining what constitutes an actual lease isn’t always straightforward. And because evaluating leases and determining the associated assets and liabilities is performed on a lease-by-lease basis, it requires a significant time commitment. For businesses with many leases, the new leasing standards can lead to significant administrative burdens and have a tremendous impact on both their financial statements and their debt covenants. Business owners need to understand the standards and get organized, sooner rather than later, to facilitate a smooth transition.

We’re here to help.

ARB can help you evaluate your leases, determine the associated assets and liabilities, and record your leases in compliance with the new standards. Contact David Jean or Gisele Couturier today if you have any questions or concerns about these new leasing standards.

Retirement: Qualified Retirement Plans

Join host David Jean and ARB Principal Dan Doiron as they discuss the pros and cons of various types of retirement plans in the first episode of a three part retirement series.

Maximizing Use of Form 990

ARB Director Sam Pedersen moderates the conversation between Principal Jason LeBlanc and Director Robin Cyr as they advise on how best to use Form 990 to benefit your non-profit organization. 

Recent Hosts

David V. Jean

David Jean is the Practice Leader for ARB’s Construction Industry Services Group, Succession Planning Services Group, and Business Advisory Services Group. David focuses primarily on financial accounting and consulting for construction, real estate, and manufacturing companies.

Holly D. Ferguson

Holly Ferguson joined ARB in 1996 and has been a principal for the firm since 2012. She focuses primarily on accounting and attest services for manufacturers and distributors, businesses, credit unions, and nonprofit organizations.