Key Learning Points
For dealerships applying the LIFO approach to guarantee compliance with IRS criteria and to prevent possible tax difficulties, maintaining thorough and accurate records is absolutely vital.
Dealerships have to follow particular IRS rules, including Revenue Procedure 97-36, and save all pertinent records including purchase invoices and LIFO computations, going back to the first year of LIFO election.
LIFO data should be kept in a safe place, ideally with a CPA company focused on auto dealerships, to guard them from natural catastrophes, theft, or other possible damage.
Though it requires careful recordkeeping, the Last-In, First-Out (LIFO) approach of inventory accounting can provide major tax advantages. The following is a list of the basic criteria and how your tax advisor may assist you stay free from future issues.
LIFO Foundation
Under the Last-In, First-Out (LIFO) approach, your dealership’s acquired or manufactured last items of inventory are sold or eliminated from inventory first. Closing inventory items are taken from the opening inventory in the order of purchase and obtained in that tax year.
The LIFO approach has complicated guidelines for use. The IRS claims that two often utilized techniques to price LIFO inventories are:
- Dollar-Value Method: Based on the types of things in the inventory, goods and products have to be arranged into one or more pools—classes of objects.
- Simplified Dollar-Value Method: From suitable government price indexes, create several inventory pools generally falling into appropriate categories. Project the annual change in price for inventory items in the pools using variations in the price index. This approach is electable by qualified small businesses (average annual gross receipts of $5 million or less for the three prior tax years).
Value of Complete Notes
Many auto dealerships apply the LIFO approach of inventory accounting. Although it can offer major tax advantages, it’s important to satisfy several tax law criteria including keeping thorough documentation.
Dealerships choosing to employ the alternative LIFO approach for new vehicle inventories have to follow IRS Revenue Procedure 97-36, which replaced IRS Revenue Procedure 92-79. Under this direction, a vehicle dealer has to keep “complete records” of the computations applying the alternative LIFO approach. Every new car also has actual purchase invoices that the dealership needs to keep.
Generally speaking, this means that the dealership should keep all invoices and related LIFO calculations going back to the first year the alternative LIFO method was used for. Should your dealership have chosen to employ alternative LIFO years ago, the records should be permanently kept in a safe place. Steer clear of maintaining records on the company grounds to avoid having a natural disaster or other damage or theft destroy them.
Possible Drawbacks of Inadequate Documentation
Poor records might cause costly tax difficulties. Good records will help you avoid tax penalties and resist IRS challenges. Should you also be selling your dealership, the buyer could ask you to lower the price by the LIFO taxes avoided.
