The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, provided for a reduction in the income tax rate imposed on C corporations under Sec. 11(b). Given the significance of the reduction, Congress anticipated that some S corporations might revoke their S elections and convert to C corporation status to benefit from the reduced 21% corporate tax rate.
In many instances, an S corporation on the cash method of accounting that converts to a C corporation is required to change its overall method of accounting to an accrual method of accounting. In that case, Sec. 481(d) as amended by the TCJA requires an eligible terminated S corporation to take any resulting Sec. 481(a) adjustment into account over six tax years (instead of four) for positive adjustments or in one year (in the case of negative adjustments).
The AICPA submitted comments to the IRS requesting expeditious guidance concerning adjustments attributable to conversions from an S corporation to a C corporation under Sec. 481(d).
The AICPA recommended that Treasury and the IRS should provide administrative guidance on the potential application of Sec. 481(d) to receivables owned by the newly formed corporation that result from the termination of a qualified Subchapter S subsidiary (QSub) election with respect to a subsidiary owned by an eligible terminated S corporation.
The AICPA stated in its letter to the IRS:
Failure to apply section 481(d) to QSubs owned by an eligible terminated S corporation effectively means that section 481(d) will apply only to S corporations to the extent that their operations are not conducted through QSubs. The acceleration of income, if section 481(d) does not apply, would severely limit the application of section 481(d) and would subject similarly situated taxpayers to two different sets of rules. This process appears contrary to congressional intent in enacting section 481(d), which presumably was to ease the federal income tax burden associated with converting from S corporation to C corporation status in response to the TCJA's reduced corporate income tax rate.
In other advocacy news:
Implementing FASB's new credit loss standard: Current expected credit loss, or CECL, is a new standard that will change how companies account for expected credit losses and is one of the most significant changes to financial institution accounting in 40 years. The AICPA's Financial Reporting Executive Committee developed working drafts of accounting issues related to CECL's implementation. Read more.
Accounting methods for small business taxpayers: The TCJA defines a small business taxpayer as a taxpayer with average annual gross receipts in the prior-three-year period of $25 million or less. For purposes of determining whether a taxpayer qualifies as a small business taxpayer, the TCJA references the existing gross receipts test. However, if the taxpayer fails the $25 million gross receipts test for a given tax year, it may not apply any of the simplifying provisions for that tax year. The AICPA wrote the IRS with recommendations on accounting methods for small business taxpayers. Read more.
Comments on application of excise taxes: The AICPA submitted comments to the IRS on the application of excise taxes with respect to donor-advised funds. The letter made recommendations on several issues, including data collection burdens and privacy and the expanded definition of incidental benefit. Read more.
— Julia Woislaw is manager–Advocacy Communications for the AICPA. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA's editorial director, at Kenneth.Tysiac@aicpa-cima.com.