What is the correct tax treatment for industry practice of "day rental" of inventory vehicles by auto dealer: (1) reduction in basis or (2) recognition of rental income with depreciation of vehicle?
Then you have rental income and no direct offsetting expense. The "expense" will come later when they will potentially get a reduced selling price for the vehicle somewhere down the road.
Therefore, no depreciation because this is "inventory property" and not "property used in a trade or business" which would be subject to depreciation. Good point. Still, as you say, the income must be declared. Appears that we talking about the dealer's "intent" in holding the property - for sale or for rent.
So the sale price later would be reduced by direct selling expenses and that is all. This purported industry practice of reducing basis (by the rent) and not reporting the rent income is, by all appearances, smoke and mirrors.