Is Your Dealership on LIFO?
Manufacturers pricing programs could trigger tax surprise!
The Big Three 2006 pricing strategies, in combination with reduced dealer inventories, may create significant taxable income for dealers on the LIFO inventory method. Generally when a dealer keeps its inventory at a constant or rising level and vehicle prices are rising, taxes can be deferred. However, decreasing prices with reduced inventory levels can bring the opposite result, paying back part of those deferred taxes. Since dealership profitability is down for many dealers, this could create a cash flow problem at tax time.
Timely year end tax planning is needed by the dealer’s advisors in order determine the potential for LIFO recapture and the tax effects on the dealer. While one could develop a strategy of increasing inventory by year end, it is not always advisable to let tax decisions dictate your business decisions. By reviewing the effects of the problem before year end, strategies could be developed to mitigate the tax implications.
LIFO has overall been a solid long term tax deferral strategy, and will remain so in the future. However, due to the manufacturers’ current pricing challenges, dealers should have accurate year end tax projections that take into account the impact of LIFO. Please contact us with any questions.
