Price Cuts Could Push Dealer Tax Bills Up
Value pricing by auto makers, if implemented on new models as an alternative to rebates or cashbacks, would have a profound impact on dealers' inventory reserves and tax bills, says certified public accountant Mike Menear of the Boyer & Ritter accounting firm in Camp Hills, PA. He issues a cautionary bulletin on the tax implications for dealers of any switch to suggested new-vehicle prices designed
May 1, 2006
“Value pricing” by auto makers, if implemented on new models as an alternative to rebates or cashbacks, would have a “profound impact” on dealers' inventory reserves and tax bills, says certified public accountant Mike Menear of the Boyer & Ritter accounting firm in Camp Hills, PA.
He issues a cautionary bulletin on the tax implications for dealers of any switch to suggested new-vehicle prices designed to reflect actual transaction prices.
Users of the LIFO (Last In, First Out) inventory reserve tax system face a tax adjustment that could prove substantial, says Menear.
A base price rollback — which domestic auto makers tried but then abandoned in October — would erode the dealers' LIFO reserve and cause paybacks of that portion of tax that is deferred under the LIFO inventory method.
As an example, Menear explains, dealers could expect a LIFO reserve deduction of $40,000 or more on a $2 million inventory of new vehicles — if factories cut invoice prices by 2%.
He recommends the following actions for softening the negative tax impact of price rollbacks:
Stock all-new models or substantially redesigned models for LIFO purposes as a neutralizing force on LIFO reserves during periods of price declines.
Insure that inventory levels are adequate to prevent liquidating older LIFO layers.
Stock models with no dealer base cost decreases or with the lowest dealer base cost decreases.
But he adds: “Inventory management and control decisions should always be based on business circumstances, not tax results.”
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