A recent article from Bloomberg Law examined how declining equipment inventories could impact dealers' tax bills.
For dealers using a LIFO (last in, first out) accounting method for valuing their inventory, whereby the most recently purchased products are expensed as cost of goods sold (allowing lower-priced, older products to be reported as inventory), this could prove particularly problematic. Where a LIFO accounting system normally seeks to keep reported income down when prices rise, the current inventory declines could trigger a recapture tax.
The article states the supply chain issues also pose a problem for dealers "that use the 100% accelerated depreciation tax break created by the 2017 tax law, allowing businesses to quickly write-off long-term assets faster than their value declines" (See "How Will 2017 U.S. Tax Reform Impact Your Dealership?" for more information on the 2017 Tax Cuts & Jobs Act impacted dealers).
The report quotes James River Equipment (a 45-store ag and construction John Deere dealer) President Mark Romer on how the dealership is being forced to sell rental equipment.
“When you can’t get the inventory and you’re still selling, you end up with unusually high taxable profit, because the benefit you had of being able to have accelerated depreciation in your rental fleet evaporates to the extent that your rental fleet shrinks,” Romer said in an interview. “We’ll replace that as soon as we can, but that probably will be later next year.”
The report also quoted Kyle Pomerleau, senior fellow specializing in federal tax policy at the American Enterprise Institute as saying, "This sort of issue is very acute for small and medium-sized businesses where cash flow matters quite a deal. This is another unnoticed impact of the supply chain disruption, on top of the other issues that people are worried about.”
For dealers using a LIFO system, there may be good news, however. The report mentions a coalition of lawmakers and trade groups currently lobbying the Treasury Department to protect businesses using LIFO through the "a provision within the U.S. tax code that grants the Treasury secretary unilateral authority to grant temporary tax relief to LIFO businesses if a 'major trade interruption' occurs," with a requested 3 years for dealers to restock inventories to avoid higher taxes. Reportedly, however, the Treasury has "remained noncommittal" about providing this relief.
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