The average price of a new car climbed $3,301 in 2020 and $6,220 in 2021. Even used car prices, which typically rise about 1% per year, have soared 45%, to an average of nearly $26,000. But it’s causing all sorts of problems for the rest of us, who have to pay extra taxes on those shrinking inventories.
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 last-in, 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 first-in, 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 Senators have petitioned the 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!