OIRA Completes Review of Proposed Regulations for TCJA Changes to §451

We are getting close to our first look at the IRS’s proposed regulations to implement the revenue recognition conformity and advance payment provisions added to IRC §451 by the Tax Cuts and Jobs Act. Tax NotesToday Federal reported on August 22, 2019, that the IRS’s proposed regulations related to both issues have now completed their review at the Office of Information and Regulatory Affairs of the Office of Management and Budget.[1]

The revenue conformity rules of IRC §451(b) apply to any taxpayer who reports on the accrual method of accounting for tax purposes[2] that has an applicable financial statement (AFR) as defined in IRC §451(b)(3).  Under these rules, the taxpayer must generally recognize revenue for tax purposes no later than the date on which the revenue is recognized in the AFR.

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Taxpayers Using Impermissible Method Can Use Revenue Procedure 2018-60 to Convert Automatically to a Permitted Method

Rev. Proc. 2018-60 was released by the IRS to allow taxpayers to obtain consent to change from their current method of accounting to take into account the requirements of IRC §451(b)(1)(A), added by the Tax Cuts and Jobs Act, effective for tax years beginning in 2018.  But is that automatic change still available if the method the taxpayer had previously been using was one not allowed for tax purposes?

In CCA 201852019 the IRS Chief Counsel’s office decided the answer was yes.

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IRS Releases Proposed Revenue Procedure to Deal with Accounting Method Change Requests Related to FASB Revenue Recognition Standard

One of the key developments keeping those CPAs who specialize on the “accounting and auditing” (or A&A as we tend to refer to it) side of the profession jumping has been the soon to be implemented standard titled “Revenue from Contracts with Customers” FASB Accounting Standards Update 2014-09, which makes significant changes to revenue recognition, particularly the timing of such recognition of revenue. 

Of course, for those of us working in the tax arena, when you start talking about timing of recognition you realize that if any of this either does flow onto a tax return or a taxpayer reasonably would like to have it do so to keep tax and book the same in this area you realize you are dealing with an “accounting method” which would require IRS permission to change under IRC §446.  And we also realize the timing of the inclusion of an item of income is governed under the IRC by IRC §451.

The IRS has been aware of this potential problem as well, and now has released a proposed Revenue Procedure to allow for certain automatic changes in accounting methods.  This proposed procedure, on which the IRS is seeking comments, is found in IRS Notice 2017-17.

Image copyright damedeeso / 123RF Stock Photo

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Revenue from Gift Cards Redeemable for Both Goods and Services May Be Partially Deferred Under Reg. 1.451-5

Accrual basis taxpayers who receive advanced for the sale of goods prior to the actual sale of such goods may, under Reg. §1.451-5, defer recognition of such income until the earliest of:

  • The year in which the income would be properly accruable under the taxpayer’s method of accounting for tax purposes;
  • The year in which the income is recognized for financial statement purposes; or
  • The end of the second year following the year of receipt. [Reg. §1.451-5(b)1, (c)]

But what about a taxpayer who sells gift cards which can be deemed for either goods sold by the taxpayer or services the taxpayer sells?  That situation exists in many contexts, as retailers often offer for sale, in addition to products, servicesFor instance, appliance/electronics stores offer, in addition to the goods, various extended warranty, delivery, repair and installation services.  In TAM 201610017 the National Office advised that such entities may make use of a partial deferral.

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Taxpayer's Right to Income Neither Fixed nor Capable of Reasonable Estimate at Year End, So Not Included in Income Until Received

All too often we, as tax practitioners, are tempted to say that a matter is “just timing” when looking at whether something has been properly handled on a tax return.  That is, it was properly included in income or properly deducted, just perhaps in the wrong year. 

But, as we all know when we think about the issue, “just timing” is actually a very important issue to our clients and the IRS, as well in the financial reporting arena when preparing financial statements.  But tax rules and FASB’s provisions don’t look at the matter in the same way.

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