Lifo

[Ralph]

Tis the season to think about this trap as well. I got caught in 2008, when my "former" accountant realized that the three year consistent year after year inventory reduction required a payback of LIFO. So, my 2008 statement included $600,000 added back into my bottom line.

I assume I'm the only dope who didn't catch it, but that said, I thought I'd throw it out there. If your inventories have shrunk from beginning to end of this fiscal year, and you're on LIFO, that reduction needs to be calculated and the LIFO account reduced accordingly. I don't know anyone who has not decreased their inventory this year.

So...in this tough market, if you're on LIFO inventory accounting, you'll have a substantial "Profit" to pay taxes on this year. Sorry for the lump of coal in the stocking for anyone unaware of this situation.

[XDCX]

Great topic - I bet a lot of dealers will get tripped up on this. :(

LIFO is great when times are good and you're able to shelter some profits but it can be a killer when it's time to pay-up.

As a point of clarification, does a dealer have to make a LIFO adjustment if the parts inventory falls for one year, or does it take three consecutive years before you're required to make an adjustment?

On a final note, I'll move this thread to the Parts section of the forum so it's easier to find in the future.

Thanks again for a great topic - I don't recall hearing about this issue in Automotive News or anywhere else. :)

[Ralph]

With the government looking for money, this is a place little known and with the potential of big results for the treasury.

[XDCX]

I thought of this thread when I read the article in Automotive News concerning LIFO and the tax hit many dealers will take this year. The article indicated that some dealers will get hit with an extra tax bill of $100K or more. :(

It was an education for me, I always thought LIFO only pertained to parts inventories.

It was also interesting to read that dealers have the option of spreading their LIFO tax payment over four years if they stop using LIFO.

[Ralph]

I've added almost $700,000 to my bottom line in LIFO reductions in 2008 and 2009 returns. Brutal !!! Just when you can least afford it, if you're out of cash to reduce the profits, (bonus it to executive to offset the taxable income), its a killer paying the IRS for this.

[blauto]

There are ways arounf this. You can stop lifo in a given year. Then you have i believe 3 years to average the recovered profits. SO the $600,000 would be $200,000 per year. You must then stay off LIFO for a minimum number of years 3 or 5 before you can get back on.

[XDCX]

There are ways arounf this. You can stop lifo in a given year. Then you have i believe 3 years to average the recovered profits. SO the $600,000 would be $200,000 per year. You must then stay off LIFO for a minimum number of years 3 or 5 before you can get back on.

Thanks for the added information. :)

I bet there are a number of dealers who are going to drop LIFO in an effort to lower their tax bill in April.

[Ralph]

Problem is I had a $998,000 balance December 31, 2008. Drop LIFO, spread it over 3 years, and it comes to the same blistering $330,000 a year in added taxable bottom line. that's great info however for those who may have only been on LIFO a shorter period of time and see the potential time bomb that being on it now will cause. If business does build back up in the next years, and you're on lifo, you're reducing taxable income but storing it away for a rainy day that may turn into a biblical deluge.

[XDCX]

Concerning the report in Automotive News, I thought it was interesting that some dealers simply couldn't get enough new car inventory on their lot by the end of the year to avoid LIFO exposure.

They knew they needed the inventory to avoid LIFO exposure and they had orders in the system but the vehicles didn't get built.