The car chip shortage saga is just beginning

The global shortage of computer chips has created a big problem for the automotive industry. The Associated Press reported that new vehicle sales in the U.S. are off an average of 12% or more because of the shortage. What has this chip shortage meant for car dealerships? Selling cars is more difficult due to an inventory shortage which has driven up the price of a new car.

Why is the global shortage of computer chips having a significant impact on the car industry? Today’s cars are more technologically advanced than their predecessors; it takes a number of car chips to make that happen. Today’s cars are often called “computers on wheels.”  

Many modern cars have over 100 sensor modules, each one containing multiple chips. A rough estimate puts the number of car chips in a vehicle anywhere between 1,400 to 3,000. Working in tandem with the car’s electrical control unit or ECU, these chips are responsible for controlling every system in the car from the lights and display screens to the powertrain which includes basically anything from the engine through the wheels.

Is there an end in sight?

When will the car chip shortage end? While some forecasters are predicting that things will improve towards the end of 2022, according to executives from several manufacturers including BMW and Volkswagen, the shortage of car chips is expected to last into 2023 so consumers will continue to deal with inflated car prices due to reductions in inventory.

While dealers have been experiencing less sales, their profits have been up because new cars have typically been selling for the MSRP or, in some cases, for thousands of dollars more for models in high demand. If consumers cannot locate the car they want at the dealership, they can preorder it online and have it delivered to the dealership.

The problem for dealerships facing record-low inventory levels with no quick fix in sight is they could face significant tax burdens if they use the “last in, first out” inventory valuation to defer taxes. Dealerships using LIFO accounting methods could have additional taxable income due to a significant reduction in inventory, forcing a LIFO recapture for the dealer and an increased tax liability for the fiscal year.

Therefore, if you own a dealership struggling with a low inventory level, it’s essential to hire the services of a CPA firm that specializes in car dealership accounting who will work with you to find ways to offset a possible increase in your tax liability.

Changing the way you sell cars

The car chip shortage has had an effect on dealerships across the country. Like the COVID-19 pandemic, the chip shortage has brought about permanent changes in how consumers shop for and purchase cars. 

Previous to the chip shortage, ordering a car from their local dealership was a rare occurrence for the majority of car shoppers, but dealers expect it to continue. 

These and other changes will have an effect on accounting practices for your dealership. At GYL CPAs and Advisors, our specialists can help your dealership navigate these changes in the automotive industry.

Visit our website to learn how the Coronavirus impacted car dealerships.