Automotive News: Valuing Parts Inventory
Attention Auto Dealers: Replacement cost method for valuing parts inventory
There is an important tax accounting development that could reduce your recordkeeping and accounting burdens. As you may be aware, many automobile dealers value their inventories of auto parts at the amount it would cost to buy replacement parts, rather than at “actual cost.” What you may not know is that IRS has, in the past, successfully challenged this method on audit.
Nonetheless, the IRS has decided to bow to industry practice and now permits automobile dealers to use replacement cost to value inventory, provided they meet certain requirements. Among these are the requirement that dealers use a “standard price list” to determine replacement cost, and the requirement that the method be used consistently for all financial accounting purposes.
If you already use the replacement cost method, you need do nothing in order to continue, apart from ensuring that you're otherwise complying with IRS requirements. And if IRS has raised (or does raise) the issue in an audit, it is supposed to drop the issue. This audit protection does not apply, however, if you've been using a different method than the replacement cost method to value auto parts. If you do not already use the replacement cost method and would like to change, you will have to file a form that permits an automatic change of accounting method.
Whether or not you need to change your accounting method, MGO can help you be certain you are in full compliance with the IRS rules. Contact us to learn more.
