Auto #1 – Auto Dealers LIFO Inventory Issues
You may recall that in January we told you about how supply chain issues could lead to higher taxes. This problem is especially acute for auto dealers who historically use the Last In First Out (LIFO) method to record inventory.
As we noted, LIFO is attractive in an environment where prices continue to rise as it reduces taxable income, which in turn reduces taxes and increases cash flow. However, LIFO depends on the ability to replenish “LIFO layers” buying replacement goods at the same or higher prices. Failure to do so, currently because of supply chain interruptions, leads to higher taxable income.
While the Treasury Department has the authority to grant relief for qualified inventory interruptions, it still hasn’t done so despite much lobbying by the auto industry, the American Institute of Certified Public Accountants (AICPA), and many members of the House and Senate. So, Rep. Dan Kildee (D-Mich) has taken it upon himself to introduce the "Supply Chain Disruptions Relief Act" to provide this relief.
The bill would deem that auto dealers have satisfied the requirements for a qualified liquidation of LIFO inventory. This would mean they have until 2025 to replace the liquidated vehicles at higher prices – essentially restoring the LIFO layers – or recognize the additional income at that point.
These rules would apply to taxable years ending after March 12, 2020 and before January 1, 2022. Dealers would have until the due date of their return, including extensions, to elect to take advantage of this provision. If a return has already been filed, the election can be made on the return for the first taxable year after the date of enactment of the bill and treated as a change in accounting method.
While Rep. Kildee’s bill applies only to new car auto dealers, it is possible it will spur the IRS to take advantage of its existing authority to benefit others who use LIFO and are struggling with the same issues. Stay tuned.
Auto #2 – Autofill Tax Returns
Congressman Bill Foster (D-IL) thinks he has a solution to the cost and difficulty of filing federal tax returns. He has introduced legislation, the ‘‘Autofill Act of 2022,” which will allow taxpayers to file returns online on a secure IRS website. The returns would be automatically populated with information already in IRS systems – W-2s, 1099s, Social Security information.
What Autofill won’t do is help you take advantage of tax planning strategies or report items such as deductible casualty losses or accurate stock or property basis information for computing capital gains. If you own partnership interests or S Corporation stock, it isn’t clear that tax information from those entities will accurately transfer to Autofill if they transfer at all. It also isn’t clear if taxpayers will be allowed to designate third parties to complete the returns on their behalf. Importantly, before downloading the appropriate form, taxpayers would have to acknowledge that they are responsible for the accuracy of the returns and that they will verify the information.
It may be of some comfort that Canada already has a program it calls "Auto-fill my return." According to the website, “Auto-fill my return is a secure Canada Revenue Agency (CRA) service that allows individuals and authorized representatives using certified software, to automatically fill in parts of an income tax and benefit return with information that the CRA has available at the time of the request.”
We’ll see if that’s enough to convince Congress to follow Rep. Foster’s lead.
Count on Friedman LLP
We continue to monitor what goes on in Washington so we can keep you as informed as possible. As always, feel free to contact your Friedman LLP advisor with any questions.