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.

IRC §451(b)(3) provides the following definition of an AFR:

(3) Applicable financial statement

For purposes of this subsection, the term “applicable financial statement” means—

(A) a financial statement which is certified as being prepared in accordance with generally accepted accounting principles and which is—

(i) a 10–K (or successor form), or annual statement to shareholders, required to be filed by the taxpayer with the United StatesSecurities and Exchange Commission,

(ii) an audited financial statement of the taxpayer which is used for—

(I) credit purposes,

(II) reporting to shareholders, partners, or other proprietors, or to beneficiaries, or

(III) any other substantial nontax purpose,

 but only if there is no statement of the taxpayer described in clause (i), or

(iii) filed by the taxpayer with any other Federal agency for purposes other than Federal tax purposes, but only if there is no statement of the taxpayer described in clause (i) or (ii),

(B) a financial statement which is made on the basis of international financial reporting standards and is filed by the taxpayer with an agency of a foreign government which is equivalent to the United States Securities and Exchange Commission and which has reporting standards not less stringent than the standards required by such Commission, but only if there is no statement of the taxpayer described in subparagraph (A), or

(C) a financial statement filed by the taxpayer with any other regulatory or governmental body specified by the Secretary, but only if there is no statement of the taxpayer described in subparagraph (A) or (B).

IRC §451(c) governs the treatment of advance payments received by the taxpayer, codifying Revenue Procedure 2004-34, changing it form an elective to mandatory treatment for such advance payments.[3]

The article notes some specific concerns practitioners have regarding §451 that they hope will be positively addressed by these regulations:

Practitioners have raised concerns about the broad scope of section 451(b) — when it was only supposed to address a couple of issues — and its potential for unintended consequences. Some have asked the IRS and Treasury to allow cost of goods sold offsets to follow the income accelerations of section 451(b) and (c). The Joint Committee on Taxation’s blue book doesn’t agree with that suggestion.[4]

OIRA now reviews proposed regulations under the IRC coming from the Treasury Department prior to their release, either as proposed or final regulations.  The completion of this review clears the way for Treasury to release these proposed regulations, but there’s no guarantee how quickly Treasury will move to release this guidance.

[1] Nathan J. Richman, “Tax Accounting Proposed Regs Could Be on the Horizon,” Tax Notes Today Federal, August 22, 2019, 2019 TNTF 163-4, https://www.taxnotes.com/tax-notes-today-federal/accounting-periods-and-methods/tax-accounting-proposed-regs-could-be-horizon/2019/08/22/29vvm (subscription required), retrieved August 24, 2019.

[2] IRC §451(b)(1)(A)

[3] Nathan J. Richman, “Tax Accounting Proposed Regs Could Be on the Horizon,” Tax Notes Today Federal, August 22, 2019, 2019 TNTF 163-4, https://www.taxnotes.com/tax-notes-today-federal/accounting-periods-and-methods/tax-accounting-proposed-regs-could-be-horizon/2019/08/22/29vvm (subscription required), retrieved August 24, 2019.

[4] Ibid