By Scott Lewis, CPA, MSA

In 2020 and 2021, due to foreign supply chain disruptions, the production and delivery of new vehicles to auto dealerships slowed down considerably. The number of new vehicles in inventory at year-end, particularly at the end of 2021, were severely reduced from normal levels. Most dealerships that were using the last-in, first-out (LIFO) methodology of accounting were negatively affected and realized LIFO taxable income of, in some cases, millions of dollars.

NADA and other associations requested LIFO relief from the Treasury Department on multiple occasions over the last two years. The Treasury indicated that legislative action was needed. In April 2022, Congress drafted “The Supply Chain Disruptions Relief Act”. The bill includes a provision to elect deferring LIFO recapture income for 2020 and 2021. Dealers would have until the end of 2025 to replenish their vehicle inventories back to normal levels.

Congress is currently negotiating an omnibus spending bill which includes some unrelated provisions, and these may include this bill. If this does pass, dealers will generally need to file a change in accounting method with their tax returns in order to make this election. Previously reported LIFO recapture income would be reversed, and a current year taxable deduction would be generated.

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