P&L Versus Tax Returns?

January 15, 2026

by a searcher from Dartmouth College in Hollis, NH 03049, USA

I recently went under LOI and just had the opportunity to look through additional financial documents including tax returns. I've noticed that reported revenue on the 2023 and 2024 tax returns were 3.5% and 6% lower than the comparable number on the P&L. The net income level was 8.5% and 12.5% lower on the tax returns compared to the P&L. What gaps have searchers seen in the past? I saw a post on here where the numbers on the tax return were a quarter of the numbers they had based their bid on and this isn't that. Still, is this a big red flag? I imagine some of this may be due to technical factors like timing on December orders and deductions for company cars, but I don't think that explains the trend for both years. Thanks!

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Reply by a professional
in Austin, TX, USA

Thanks Luke. Zach, I am an M&A advisor and operating finance partner who does diligence work regularly and who has also been on the buy side myself, this is exactly the kind of variance I expect to see when I line up P&Ls against tax returns. In practice, I am less focused on whether the numbers match perfectly and more focused on why they do not and whether the explanation is consistent and reconcilable. When I review gaps like the ones you described, these are the specific things I look for. Consistency of the accounting method such as cash versus accrual or a hybrid approach and whether it is applied the same way year over year. Timing differences, especially around December billing, accounts receivable, accrued payroll or bonuses, and prepaid expenses. Owner specific or tax driven deductions such as vehicles, benefits, retirement contributions, and accelerated depreciation. Permanent versus temporary differences and whether they clearly bridge book income to taxable income. Trend logic and whether the deltas move in a rational and explainable way across both years. Based on what you posted, a 3.5% to 6% revenue delta and an 8.5% to 12.5% net income delta fall well within what I would consider normal for a lower middle market business. The fact that a similar pattern shows up in both years actually gives me more comfort than if this were a one year anomaly. This does not read like misrepresentation. It reads like timing differences and reasonable tax optimization. My recommendations would be as follows: Ask for a clean reconciliation schedule from the book P&L to the filed tax returns for both years. This should be mechanical and easy to follow. Isolate fourth quarter timing items such as accounts receivable, deferred revenue, and accrued expenses to confirm how much of the revenue gap is simply cash versus accrual. Build a normalized EBITDA bridge that removes owner specific and non recurring tax items and pressure test your valuation using that number. Pay close attention to how clearly and confidently the seller and their CPA explain the differences. Clarity here matters more than the absolute percentages. Unless the seller cannot reconcile the differences or the add backs start to feel aggressive, this looks like standard diligence work rather than a red flag.

Reply by a searcher
from Duke University in Tulsa, OK, USA

If the revenue is not matching that is a huge red flag that I would press immediately. You could have a deal killer before you spend too much on due diligence. If the net income doesn't match that could be due to add backs but it is the responsibility of the seller to explain and justify all add backs to a buyer. FYI, banks will never accept add backs when looking at financing so it will have to meet underwriting requirements based on the tax return.

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