“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.”