When your dealership elects the LIFO inventory valuation method, it is a requirement to maintain comprehensive records.
Recordkeeping is essential to business operations and automobile dealerships are no exception.
For dealerships electing the LIFO method for new and used vehicle inventory valuation, requirements for record retention are included in the IRS Revenue Procedure 97-36. (This IRS guidance superseded and amplified IRS Revenue Procedure 92-79.) Under this pronouncement, an automobile dealership must maintain and retain "complete records" of the computations. In addition, the dealership must maintain actual purchase invoices for every vehicle. In the case of used vehicles, bills of sale on trade vehicles or bills of sale from the auction or other vendor should be retained for each vehicle included in the calculation.
These requirements have been generally interpreted to mean that the automotive dealership should retain all vehicle invoices and related LIFO computations dating back to the first year for which the LIFO method was elected. If your dealership made the election to use LIFO years ago, the records should be permanently stored in a secure location. Do not make the common mistake of keeping the records on the business premises. You don't want to run the risk that the records may be destroyed by a natural disaster or otherwise ruined or stolen. What is the potential downside? If you don't keep adequate records, it could lead to expensive tax complications. Good records may help you withstand challenges from the IRS and avoid tax penalties.
An automotive dealership electing the LIFO inventory valuation method should also ensure that it permanently maintains copies of the IRS Form 970 originally used for the LIFO election and maintains copies of any IRS Form 3115 requests to change accounting methods.
Practical suggestion: Have the required LIFO records held by your CPA firm. Don't assume the firm has the records if you used a different practitioner years ago.
LBMC LIFO Solutions offers an affordable, easy-to-use LIFO calculation software for auto dealers and CPA firms with auto dealer clients.
If you have questions about the LIFO method or our software, feel free to contact LBMC at 615-377-4600 to speak with a representative or use the contact form on this page.
LBMC LIFO Solutions, LLC, offers a FREE LIFO software demo that you can download here.
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