Accounting method change procedures for book-tax conformity rule

By Sally P. Schreiber, J.D.

The IRS has provided procedures (Rev. Proc. 2018-60) under which a taxpayer may obtain automatic consent to change a method of accounting to comply with Sec. 451(b), as amended by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. The revenue procedure also gives certain qualifying taxpayers with streamlined procedures to make a method change to comply with Sec. 451(b) without filing a Form 3115, Application for Change in Accounting Method, for the first tax year that begins after Dec. 31, 2017.

The TCJA made several changes to the timing of income for accrual method taxpayers, including adding new Sec. 451(b), which is generally effective for tax years beginning after Dec. 31, 2017. Sec. 451(b) generally imposes a book-tax conformity rule for recognizing income for tax purposes. It provides that an accrual method taxpayer cannot treat the all-events test as being met for any item of gross income (or portion thereof) any later than when that item is taken into account as revenue in the taxpayer’s applicable financial statement (or other financial statement specified by the IRS).

Rev. Proc. 2018-60 provides procedures for automatic changes for taxpayers to change their method of accounting to comply with Sec. 451(b) by filing Form 3115. Taxpayers complying with the automatic change procedures in the revenue procedure will receive audit protection.

The IRS is also providing streamlined method change procedures for qualifying taxpayers to ease these taxpayers’ administrative burden in complying with the TCJA amendments to Sec. 451(b) for the first tax year beginning after Dec. 31, 2017. Under the streamlined method, qualifying taxpayers will not have to file a Form 3115, but can comply with Sec. 451(b) simply by filing a federal tax return.

Taxpayers are permitted to use the streamlined method change procedures to make a change in method of accounting to comply with Sec. 451(b) if the change:

  • Results in a zero Sec. 481(a) adjustment; or
  • If the taxpayer requesting the change is a small business taxpayer, as defined in the Rev. Proc. 2018-60.

A small business taxpayer is a taxpayer who meets the Sec. 448(c) gross receipts test because it has average annual gross receipts for the three prior tax years of $25 million or less.

Taxpayers that qualify to use the streamlined method change procedures may nonetheless choose to file a Form 3115 in order to retain a clear record of their change in accounting method, to make permissible concurrent changes on the same Form 3115, or to make a change in method of accounting with audit protection.

The revenue procedure, which modifies Rev. Proc. 2018-31, is effective for tax years beginning after Dec. 31, 2017.  

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.

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