Update on Potential LIFO Relief – “Supply Chain Disruptions Relief Act” (H.R. 7382/S. 4105)
As with so many aspects of our lives, the pandemic has dramatically changed the landscape of dealerships as we know them – and that’s requiring them to adapt in creative new ways. One of the largest talking points in the dealership industry is the shortage of microchips, which has caused a large-scale decline in inventory levels all over.
As a result, those dealerships that have elected the Last In, First Out (LIFO) inventory method in the past are recognizing income triggered by LIFO recapture since their inventory levels are at an all-time low – and that brings on a whole new set of challenges.
NADA working for relief
In response to LIFO recapture caused by uncontrollable pandemic-driven inventory shortfalls, the National Automobile Dealers Association (NADA) has been advocating for new legislation that would provide relief for dealerships feeling the LIFO strain. If passed, H.R. 7382/S. 4105 would:
- Provide a statutory determination that the requirements for a qualified liquidation under Section 473 of the Internal Revenue Code have been satisfied for new car dealerships that have experienced a reduction of new vehicles held in LIFO inventory
- Allow dealerships to replenish inventory and compute their LIFO reserve up to the 2025 tax year
- Permit taxpayers to file amended returns or offset their tax liability on future returns to claim relief
- Direct the Treasury to provide regulatory guidance which would allow dealerships to calculate LIFO during the extended grace period as mentioned above
Support from the Treasury
There is a strong need for this bill to be passed, as Congress has acknowledged that vehicle assembly plants and suppliers across the world have drastically slowed down production during the pandemic, which has caused a large decline in dealership inventory of new cars. The Treasury Department does have authority under Section 473 to allow LIFO relief to businesses if a “major foreign trade interruption” makes inventory replacement difficult – and NADA is fighting to provide relief under that code.
On September 2, 2022, NADA provided this update to potential LIFO relief: the Treasury Department has indicated its support for a legislative solution to provide relief and will work with Congress to do so.
The deadline is looming
With Corporate returns due September 15, the drafted legislation would allow dealers who have already filed to claim relief. In lieu of filing an amended return, the bill would allow dealerships to recompute their tax liability retroactively without the added expense of filing an amended return. Any LIFO recapture that was already paid to date will be deemed pre-paid federal income taxes that can be used to offset future tax liability. Currently, the House LIFO bill has 131 co-sponsors and the Senate bill has 50 co-sponsors.
Watch and wait
This is welcome news for dealerships all over on LIFO – we’ll continue to watch and provide updates as the bill progresses through Congress.