By now, most companies are aware that FASB has issued an Accounting Standards Update (ASU) for revenue recognition related to contracts with customers (ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606)). Some companies may have already started planning the implementation for financial statement purposes. However, the effect of this change in financial accounting hits more than just the financial statements—significant changes could also be in store for tax purposes.
Even though implementation of the standard has been delayed, companies should get a jump on analyzing its effects and evaluating tax methods. Companies waiting until the last minute to understand the tax implications of the change may be at a disadvantage due to a change in information flow or timing for making crucial accounting method changes.
TAX ACCOUNTING METHOD CONSIDERATIONS
It is important to understand that if a company's tax method has been following financial accounting and the company changes its book method, it cannot simply change its tax method to follow the new book method. Rather, it needs to evaluate whether applying the tax rules would result in the same answer as the new book method, and, if so, the company will have to file a Form 3115, Application for Change in Accounting Method, to request consent from the IRS to change its tax method of accounting for an item.
For certain changes enumerated in Rev. Proc. 2015-14, IRS consent is automatic if the taxpayer meets certain eligibility requirements. All other changes require advance consent. An automatic method change request is due by the extended due date of the federal income tax return, and an advance consent method change request is due by the last day of the tax year of the change. Upon the taxpayer's filing of Form 3115, the IRS will permit the taxpayer to use the new method of accounting for automatic changes. For advance consent changes, the IRS will permit the taxpayer to use the method only after consent has been granted and the terms and conditions have been accepted by the taxpayer.
In January 2015, the IRS issued two revenue procedures (Rev. Proc. 2015-13 and Rev. Proc. 2015-14) that update the procedural rules to change a method of accounting for federal income tax purposes. A company should refer to these revenue procedures when evaluating the need to change its tax method. Most changes related to revenue recognition are not currently included in the list of automatic changes, so companies should plan ahead for the additional effort and earlier deadline required for filing an advance consent change.
However, ASU No. 2014-09 has not gone unnoticed by the IRS. In May 2015, the IRS issued Notice 2015-40, requesting comments regarding the possible effects of the new revenue recognition standard on a taxpayer's tax accounting methods.
Looking at revenue recognition methods sooner, rather than later, will put companies at an advantage and make the implementation process smoother. It is important to make sure that tax considerations are part of the upfront discussion and not an afterthought. Taking a fresh look at the tax methods around revenue recognition will be key in understanding the effect of any book changes.
For a detailed discussion of the issues in this area, see "Tax Clinic: What Does the New Revenue Recognition Standard Mean for Tax?" by Mathew Abraham, CPA, and Ellen F. Martin, CPA, in the February 2016 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief, The Tax Adviser
Also in the February issue:
- An update on developments affecting partners and partnerships.
- A discussion of the taxation of worthless and abandoned investments.
- A look at tax return due diligence and quality control.
The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year.