Structuring a Bona Fide Sale of Excess or Slow-Moving Inventory for Tax Purposes

Lessons from Relevant Court Cases

Mark Wills, CPA, and Bruce M. Bird, JD, CPA, and Michael Sinkey

When preparing financial statements, corporations must typically follow GAAP. When computing federal income tax liability, corporate taxpayers are required to follow the tax law. A corporation that follows GAAP for book purposes and the tax law for tax purposes often faces significant book-to-tax adjustments. The IRS has generally broad discretion in deciding whether an accounting method employed by a taxpayer to determine taxable income clearly reflects income for tax purposes. If this is not the case, the commissioner will prescribe a different accounting method that does clearly reflect income.