Auto dealers across the country would suffer financial losses if Congressional efforts to repeal the LIFO (Last In, First Out) inventory accounting method were successful.
A lot of dealers in the country use this method for new vehicle inventory to establish both book and taxable income. Congress authorized the method nearly 70 years ago and it has become widely accepted and used. Today, dealers are being urged to contact their state dealer association to protest the repeal effort.
Use of the LIFO method provides tax advantages for dealers. In years when their inventory costs increase (inflation), the LIFO method reflects the higher cost of replacing inventory, providing a more conservative picture of the business and its taxable income.
Dealer finances would be dealt a major blow if legislation were passed preventing use of the LIFO method for valuing inventory.
In order to comply with the proposed legislation, dealers would have to recognize income to the extent of the LIFO reserve reflected on their books and records, and pay taxes on that income.
In addition, they would face higher tax bills without the LIFO method in the future. It would be particularly serious during these times when cash flow is critical and the economy is depressed, driving up the used-car market at the expense of new car sales.
The LIFO method originally was created as a conservative accounting method during times of inflation. Since the LIFO method matches the current cost of replacement inventory with current revenues, it tends to prevent inflationary profits from being reported in earnings.
In authorizing the LIFO method, Congress also mandated that it be used for financial reporting purposes.
The U.S. Senate has proposed elimination of the LIFO method twice in recent times, first for the oil and gas industry and later broadening it to include all taxpayers. The White House threatened a veto both times. A hearing on the repeal proposal was held June 13, 2006 , and Congressional talk of repeal continues today.
The National Automobile Dealers Association is among more than 50 members of The LIFO Coalition, a lobbying effort organized to oppose repeal of the LIFO method.