Supply Chain Problems Could Lead To ‘Tax Bomb’ For Dealers

A recent article by Bloomberg Law examined how declining equipment inventories could affect dealer tax bills.

For resellers using a LIFO (last in, first out) accounting method for valuing their inventory, in which the most recently purchased products are expensed as cost of goods sold (allowing cheaper and older products to be reported as inventory) , this could prove particularly problematic. Where a LIFO accounting system normally seeks to keep reported income low when prices rise, current inventory declines could trigger a recovery tax.

The article says supply chain issues are also a problem for dealers “who use the 100% accelerated depreciation tax abatement created by the 2017 tax law, allowing companies to quickly write off assets at longer term faster than their value declines ”(see“ How Will the 2017 U.S. Tax Reform Affect Your Dealership? ”for more information on dealers affected by the Tax Cuts & Jobs Act of 2017) .

The report quotes President Mark Romer of James River Equipment (a John Deere dealership of 45 agriculture and construction stores), explaining how the dealership is forced to sell rental equipment.

“When you can’t get inventory and you’re still selling, you end up with unusually high taxable profit because the benefit you had of being able to get accelerated depreciation of your rental fleet evaporates in as your rental fleet decreases. “Romer said in an interview.” We’ll replace him as soon as we can, but it will probably be later next year. “

The report also quotes Kyle Pomerleau, senior researcher in federal tax policy at the American Enterprise Institute, as saying, “This kind of problem is very serious for small and medium-sized businesses where cash flow is very important. This is another unnoticed impact. supply chain disruption, in addition to the other issues that worry people.

For resellers using a LIFO system, however, there can be good news. The report mentions a coalition of lawmakers and business groups currently lobbying the Treasury Department to protect companies using LIFO through a “provision in the U.S. tax code that grants the Secretary of the Treasury unilateral power to grant a Temporary tax relief for LIFO companies if a “major trade ‘disruption’ occurs”, with a 3-year demand for dealers to restock inventory to avoid higher taxes. It would appear, however, that the Treasury is ” remained elusive “as to the granting of this relief.

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