recognize income attributable to the liquidation of LIFO layers if the inventory is completely replaced by the end of a replacement period. While there has been no traction from these requests to date, hope remains, and it seems the advisable action is to continue this conversation within the industry. An inventory reduction will affect LIFO reserves based upon the history of inventory levels and inflation as well as the current level of inflation. This will vary from dealer to dealer, manufacturer to manufacturer and the mix of cars versus trucks, as trucks trend more inflationary than cars. New vehicle industry data from June 2021 shows Alfa Romeo, Chevrolet cars, Ram trucks and Infiniti trucks/SUVs are at the top of the inflationary charts with Volvo trucks/SUVs and Lincoln, Jaguar and Buick cars holding at the bottom at around 1.00, zero inflation/ deflation. Newer dealerships with less layer history have trended somewhat better than those with a long layer history dating back decades, so keep in mind that a decrease in inventory does not necessarily equate to LIFO recapture. The current year inflation and the cumulative LIFO index play major roles in the calculation. Used vehicle LIFO pools continue to fare well, with surging used prices driving inflation to record levels. June industry data shows inflation in the used market of approximately 20%; however, there are signs that used vehicle price hikes may be dropping soon, and those levels of inflation could be much different by year-end. Dealers should have considered modeling minimum inventory levels and estimates of their LIFO layers beginning in October. With the year ending, this should have been appropriate timing to minimize inflation fluctuations that would affect the calculations and allow time to implement planning. A minimum inventory level can give dealers the estimated point where minimum deduction or income may result from valuing their inventory at LIFO. An estimate calculation can provide dealers with an approximation of deduction or income resulting from a change in the LIFO reserve. For dealers facing significant LIFO recapture, there are a few options to consider. Some accounting method options or changes to one’s year-end could be explored to possibly lessen the impact. However, these options are very fact-specific and may not be available to everyone. Changing from alternative LIFO to IPIC LIFO may be a viable solution where new vehicles are pooled with used vehicles and parts, spreading the effects and softening the blow. However, IPIC may only be a short-term solution since the Producer Price Index (PPI) and Consumer Price Index (CPI) used in the IPIC method historically produce lower inflation indexes and, in turn, potentially less future benefit. Changing from alternative LIFO to IPIC LIFO requires a Form 3115. If none of these options are suitable for you, and LIFO recapture is imminent, there is some consolation in that dealers could be paying fewer taxes on the recapture now if tax rates will be higher in future years. DHG is prepared to help you address LIFO recapture as it affects you and your dealership. For questions or more information, reach out to us at dealerships@dhg.com. The current year inflation and the cumulative LIFO index play major roles in the calculation. Used vehicle LIFO pools continue to fare well, with surging used prices driving inflation to record levels. June industry data shows inflation in the used market of approximately 20%; however, there are signs that used vehicle price hikes may be dropping soon, and those levels of inflation could be much different by year-end. 37 WINTER 2021
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