Unaffordable at Any Speed

Allan Rolnick, CPA

Have you tried buying a car lately‭? ‬It’s nuts‭! ‬Carmakers are scrambling to find the chips they need to power features like entertainment systems and digital displays‭. ‬That means fewer vehicles are rolling off assembly lines‭. ‬And as everyone knows‭, ‬when supplies go down‭, ‬prices go up‭. ‬That means‭ ‬dealers can scrawl‭ ‬“3,000$‭ ‬market price adjustment”‭ ‬at the bottom of the sticker‭, ‬laugh at their good fortune‭, ‬and actually get away with it‭. (‬Fun fact‭: ‬it’s called a‭ ‬“Monroney sticker”‭ ‬after Oklahoma Senator Mike Monroney‭, ‬who sponsored the Automobile Information Disclosure Act mandating the stickers back when‭ ‬Cadillacs still had tailfins‭.) ‬

The average price of a new car climbed‭ $‬3,301‭ ‬in 2020‭ ‬and‭ $‬6,220‭ ‬in 2021‭. ‬That’s partly because carmakers can’t find enough chips and partly because they aren’t wasting their supply on cheap econoboxes when they can use them for pickups and SUVs‭. ‬Even used car prices‭, ‬which typically rise about 1%‭ ‬per year‭, ‬have soared 45%‭, ‬to an average of nearly‭ $‬26,000‭. ‬Leisure Suit Larry‭, ‬walking the floor down at the local‭ ‬dealership‭, ‬is living his best life‭. ‬But it’s causing all sorts of problems for the rest of us‭ ‬‮–‬‭ ‬including Larry’s boss‭, ‬who has to pay extra taxes on those shrinking inventories‭. ‬

Here’s the problem‭. (‬Warning‭: ‬it’s boring and technical‭. ‬Soooo boring and technical‭.) ‬Most car dealers use the lastin‭, ‬first-out‭ (‬LIFO‭) ‬method to account for their inventory‭. ‬This requires them to track something called a‭ ‬“LIFO reserve‭,‬”‭ ‬which represents the difference between inventories under the LIFO method and inventories under the conventional firstin‭, ‬first‭-‬out‭ (‬FIFO‭) ‬method‭. ‬Usually‭, ‬that reserve doesn’t mean much‭. ‬However‭, ‬when inventories drop‭ ‬‮–‬‭ ‬like they have now because there aren’t enough cars to sell‭ ‬‮–‬‭ ‬dealers have to recapture part of that LIFO reserve and add it to their taxable income‭. ‬That‭, ‬in turn‭, ‬means paying tax on income they don’t actually earn‭. (‬Like I said‭, ‬it’s technical‭ ‬‮–‬‭ ‬but you don’t have to be the Mona Lisa Vito of LIFO reserves to get that it’s a problem‭.) ‬

Now‭, ‬dealers can switch to a different LIFO calculation‭. ‬There are four to choose from‭: ‬the General Dollar-Value LIFO Method‭, ‬the Simplified Dollar-Value LIFO Method‭, ‬the Inventory Price Index Computation Method‭, ‬and the Alternative LIFO Method‭. (‬Ugh‭.) ‬Or‭ ‬they could file Form 3115‭ ‬to recapture their entire LIFO reserve and spread the tax over four years‭. ‬But both of those options still mean paying unexpected taxes on income they would otherwise be able to carry forward‭. ‬

Fortunately‭, ‬car dealers vote‭. ‬And the folks in Washington who write the tax laws know that cutting taxes wins more voters‭. ‬So earlier this month‭, ‬House Democrats introduced a bipartisan bill that would let dealers wait until 2025‭ ‬to replace their inventories and determine the income attributable to their 2020‭ ‬and 2021‭ ‬sales‭. ‬Also‭, ‬92‭ ‬Representatives and 52‭ ‬S enators h ave p etitioned t he Treasury to grant temporary LIFO relief to businesses having trouble replacing inventories due to COVID supply chain interruptions‭. ‬Seeing Republicans and Democrats come together to support the measure is really something in today’s polarized environment‭. (‬Waiter‭: ‬“How would you like your steak‭, ‬sir‭?‬”‭ ‬Customer‭: ‬“Like a bipartisan Congress‭.‬”‭ ‬Waiter‭: ‬“Rare it is‭, ‬sir‭!‬”‭) ‬

There’s a step in any car-buying adventure when your salesman says‭, ‬“Let me go talk with my manager‭.‬”‭ (‬He’s not really talking with his manager‭. ‬He’s just watching the game for half an inning to make you think he’s arm-wrestling on your behalf‭.) ‬Well‭, ‬proactive planning is as close as you can get to haggling with the tax code over your bill‭. ‬And you wouldn’t buy a car without negotiating‭, ‬right‭? ‬So why on earth would you file a return without seeing what you can save‭? ‬Call us‭, ‬and let’s see if we can put you in a sweet new ride‭! ‬

Allan J Rolnick is a CPA who has been in practice for over 30‭ ‬years in Queens‭, ‬NY‭. ‬He welcomes your comments and can be reached‭ ‬at 718-896-8715‭ ‬or at allanjrcpa@aol.com‭.‬

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