Pub. 19 2020-2021 Issue 4

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S 13 new jersey auto retailer W W W . N J C A R . O R G Depending on the size of a dealer’s LIFO reserve and the current inventory’s size, dealers could be in for a sizable income pick up from the prior year. This could have an impact on future tax scenarios for either the dealership or its pass-through owners. LIFO is an accounting method that dealers elect to use. They can choose to elect off as well. First in First Out ( FIFO ) is the other accounting method dealers will use if they are not on LIFO. The potential for recapture, combined with expected income pick up associated with PPP loan forgiveness ( note that the expenses contributing to the non-taxable forgiveness income are nondeductible, essentially making the forgiveness itself taxable ) could combine for a one-two punch that hinders a dealership’s cash f low coming out of the first quarter of 2021. One planning option would be electing off LIFO. Typically, with an accounting method change, you could elect to take the reserve evenly over four years, reducing your potential tax event in the current year and taking advantage of what remains of some of the more favorable tax years ahead ( think QBI ). Not only would this apply to New Car LIFO, but it could apply to many other inventory-based tax deferrals, including dealer trade discounts. Whether this approach will work depends on a dealership’s unique tax strategy. It is not a dollar-for-dollar or one-size-fits-all strategy, and, in an adverse planning strategy, it could make sense to take in the recapture this year. Make sure you consult with your dealership tax professionals to ensure a proper LIFO estimate is indexed and all scenarios are addressed. While dealers are coming out of some record-breaking gross profit months, it is still important to keep cash reserves. Good tax planning is key to making sure the cash remains in your dealership. Dealerships should reach out to their tax advisors to develop a strategy to minimize tax liabilities and hang on to cash. Phil Craft, CPA, is a Manager in the Retail Automotive Services division of Withum and can be reached at pcraft@withum.com. Brian Wallace, CPA, is a Tax Lead in the Retail Automotive Services division and can be reached at bwallace@withum.com.