Economic Trends Dealerships Should Consider at Year-End

As you review your dealership’s financial statements and prepare year-end tax planning, it’s important to consider the economic trends that are impacting your inventory value and the subsequent impact on your profitability.

Geographic location and franchise makeup of dealers will cause individual circumstances to vary, but here are a few issues to keep in mind that could impact your inventory value and profitability.

Increased Inventory Supply

Most dealers have seen an increase in their new inventory levels in 2023. Used vehicle inventory is still relatively low, but gross vehicle profits on used inventory is flat.

Increased Interest Rates

Increased interest rates have impacted both dealerships and their customers. Increased interest rates along with increased inventory supply has increased the financing cost of inventory, decreasing profitability of dealerships. This increased interest expense and decreased profitability could trigger interest expense deductibility limitations that have not impacted dealers in the last few years. Increased interest rates have also impacted customer demand, keeping used vehicle values flat.

Electric Vehicle Supply and Demand

Many dealers are seeing excess EV inventory supply with low demand. The values of this inventory and future profitability on the sale of this inventory should be considered.

Year End Inventory Adjustments May Be Needed

Depending on your inventory valuation methods, various inventory adjustments may be needed that will impact your profitability.

Last In First Out (LIFO) Inventory Method

Remember, in order to maintain LIFO for tax purposes, the IRS requires you to have an adjustment made to your financial books every 12 months. Most dealerships will have made their adjustment last December 2022, so now is the time again if another adjustment needs to be made. If you do not, you will be forced to recapture your LIFO reserves over the next three years and won’t be able to opt back into LIFO for five more years.

Important points to remember regarding LIFO accounting:

• Required to have adjustments on December factory financials
• Increases in new inventory should provide an increase in LIFO reserve, decreasing income, but inflation has been relatively flat, which will reduce the increase in LIFO reserve. Decrease in value of used inventory could cause a recapture of LIFO reserve, increasing income, if used inventory is on the LIFO Inventory method.

Lower of Cost or Market (LCM) Inventory method

If a dealership uses the LCM inventory method for their used vehicles, inventory values need to be evaluated. Write downs to specific units must be completed to secure the tax deduction, not just a blanket reserve. In addition, from a GAAP perspective, dealers need to complete write-downs of inventory to prevent from overstating inventory and their balance sheet.  

What does this mean for your dealership?

The success of a dealership’s year end planning starts with having accurate financial statements to base planning decisions on. The value of your inventory can have a large impact on your profitability and needs to be addressed during planning.

It’s important to address these issues with your tax advisor to incorporate the impact into your year-end planning. Working with a trusted advisor will help simplify the process and set you up for success.