We can say with absolute certainty that 2020 has been like no other year in any of our lifetimes. As COVID-19 hit the U.S., many car dealers were forced to shut down or offer limited hours of service to customers due to government mandates. Once restrictions were loosened, car dealers then had to meet customer demands for vehicles, and now many are working with sparse inventory. Fortunately, most car dealers received financial assistance by participating in the Paycheck Protection Program (PPP). The influx of cash during the economic uncertainty allowed dealers to keep their employees on payroll and avoid any reduction in benefits. But with that assistance, now comes the potential of a tax burden.

With the passage of the CARES Act, Congress said the forgiveness received under PPP would not be taxable. While this is true, IRS issued Notice 2020-32 in May 2020 in which they have taken the position that the expenses used for the forgiveness are not deductible. Although this was not Congress’s intent, it appears to be a correct interpretation of the Internal Revenue Code. Thus, without Congress’s act, the payroll costs, rent, and interest expenses used in obtaining PPP forgiveness are not deductible, which in essence makes PPP taxable. The IRS guidance does not, however, address the timing of the reduction in deductible expenses. It is a very likely scenario that borrowers spent the funds in 2020 but will not receive notification of forgiveness until 2021. Without guidance, we are uncertain in which year the expenses are not deductible — 2020 or 2021. For someone whose PPP forgiveness is $500,000, the tax could be an extra $200,000+ in the year the expenses are not deductible. Until we know more, it is best to be prepared to pay the extra tax in 2020.

Another concern for car dealers on LIFO is the potential of large recaptures in 2020 due to the low volume of inventory. Many dealers are working with half the new inventory they had a year ago. This significant drop in inventory could mean a substantial increase in tax burden due to LIFO recapture. To estimate the potential impact, I looked at a dealer that has been on LIFO for 40 years. The dealer’s new inventory dropped from $15 million to $7.5 million. The LIFO recapture in 2020 is over $400,000 in my calculation. For this dealer who is already having a profitable 2020, the recapture tax is more than $150,000. Suppose you are in a similar or worse situation with your inventory levels and are on LIFO. In that case, you may want to consult with your tax adviser on your potential LIFO recapture and the option of electing off the LIFO method. The election allows you to bring your LIFO reserve balance into income over four years. If you are taxed as a C Corporation, you may have received a tax benefit at 41.5% (federal and state combined) and would now pay tax on the reserve at 27.5% (federal and state combined).

As you can see, there are plenty of tax concerns under the current tax laws but let us look at what might happen if the presidential election results in a change in administration. Any tax law changes made by a change in administration most likely will not affect 2020 rates; however, the proposed changes may impact planning opportunities for 2020. President Trump has not issued an official tax plan for any proposed changes to current tax law. Presidential candidate Joe Biden’s tax plan has major tax policy differences from the current administration. Biden’s tax plan calls for increasing the top individual tax rate to 39.6% from 37% and taxing investment income at ordinary rates for taxpayers whose income is over $1 million. This tax policy difference means high-income taxpayers that currently pay tax on long-term capital gains at 20% would instead pay tax on those gains at 39.6%. Biden’s tax plan also calls for increasing the corporate tax rate from 21% to 28%. Potentially more concerning to car dealers with larger estates than the increase in income tax rates is Biden’s plan to reduce the estate tax exemption (currently at $11.58 million) by approximately 50% and to repeal the step-up basis on death. If you believe these changes are likely to occur, you may want to consult with your estate planning and tax advisers for actions that can be taken in 2020 to preserve your estate and reduce your potential tax burden.

In summary, each taxpayer’s situation is unique and proper tax planning requires an understanding of that taxpayer’s full set of circumstances. You should consult with your tax adviser before the end of the year to avoid any tax surprises in March and April 2021.