AICPA asks IRS for tax relief for inventory liquidations


The American Institute of CPAs wants the Internal Revenue Service and the Treasury Department to help businesses facing foreign trade obstacles to maintaining inventory during the pandemic.

The AICPA requested relief under Section 473 of the Tax Code, which allows qualified taxpayers to mitigate any substantial, unexpected increases to taxable income due to involuntary liquidations of last-in, first-out inventories caused by government actions prompted by global public health concerns due to the COVID-19 pandemic. In a letter sent to officials at the IRS and the Treasury on April 27, the AICPA noted that foreign trade interruptions due to the pandemic have kept many companies and individual sellers from replacing their inventory. The AICPA believes those interruptions meet the definition of a “qualified inventory interruption” under Section 473(c)(2).

The disruptions from the pandemic have constrained supply chains around the world for more than a year. They have also led to challenges for taxpayers who use the LIFO accounting method to maintain their operational inventory, and businesses could find themselves facing steep tax bills as a result.

“Absent this relief, many fiscal and calendar year taxpayers will realize significant and unexpected tax liabilities for the 2020 taxable year,” wrote AICPA Tax Executive Committee chair Christopher Hesse

The AICPA asked for relief for taxpayers that account for their inventory using the LIFO accounting method; and who saw a decrease in their closing inventories caused by government actions in response to COVID-19. Ideally the Institute would like for the IRS and the Treasury to issue a notice stating that a taxpayer can elect relief under Section 473 if the taxpayer experienced a qualified liquidation for a liquidation year. The election would be made by attaching an election statement to a timely filed (including any extension) original federal income tax return for the first taxable year following the liquidation year (that is, the first taxable year of the replacement period), unless the taxpayer elects a new safe harbor method. Under this safe harbor, a business would be able to disregard the liquidation for that year and keep the LIFO layers related to the opening inventory of the liquidation year. Under this safe harbor, a taxpayer wouldn’t recognize income attributable to the liquidation of the LIFO layers if the business completely replaces the inventory by the end of the replacement period.

Taxpayers would make an election statement saying they’re making an irrevocable election under Section 473, they experienced a liquidation in their LIFO inventory during the liquidation year, and the liquidation was attributable to a qualified inventory interruption. The qualified liquidation year would include tax years ended March 31, 2020 through June 30, 2021. The applicable replacement period would be the three taxable years following the liquidation year.

In cases where a business has already filed its federal income tax return for an eligible liquidation year, taxpayers would be able to make a late election to use the Section 473 safe harbor method by filing an amended return within 90 days of the date the guidance is published in the Federal Register, or by filing Form 3115 for its 2021 taxable year. A partnership that already has filed its tax return would be allowed to file an amended return for the liquidation year reflecting the late election rather than an administrative adjustment request, or by filing Form 3115 for its 2021 tax year.

Separately on Monday, the AICPA issued a working draft that provides new illustrative financial statements to help companies apply the accounting guidance in the Financial Accounting Standards Board’s ASC 606 revenue recognition standard and ASC 842 leases standard to private construction contractors’ financial statements.

The AICPA is looking for feedback on the working draft from preparers of financial statements, practitioners and other interested parties. Comments can be emailed to by July 12.

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