Final rules govern income inclusion and advance payments

By Sally Schreiber, J.D.

The IRS issued final regulations (T.D. 9941) under Secs. 451(b) and (c), as amended by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, providing guidance on the timing of income inclusion under an accrual method of accounting, including the treatment of advance payments for goods, services, and certain other items. The final regulations adopt two sets of proposed regulations (REG-104554-18 and REG-14870-18), with certain revisions made in response to written comments and testimony at a public hearing on the proposed regulations.

The final regulations under Sec. 451(c) address how taxpayers treat income from advance payments under book-tax conformity rules, specifically the timing of inclusion under Sec. 451(c) of advance payments for goods, services, and other items.

The final regulations under Sec. 451(b) provide guidance regarding the AFS income inclusion rule, under which taxpayers that use the accrual method and have an applicable financial statement (AFS) are required to recognize income when the all-events test is met or when the item of income is included in revenue in the taxpayer’s AFS.

Sec. 451(b), which was effective for tax years beginning after Dec. 31, 2017, requires accrual-method taxpayers that were deferring income to a tax year later than when it is recognized on the taxpayer’s books to change their existing tax method of accounting. Sec. 451(c) allows accrual-method taxpayers with an AFS to use a deferral method of accounting provided in Sec. 451(c) for advance payments. The final regulations implement these provisions.

Guidance obsolete

With the issuance of the final regulations, Rev. Procs. 2004-33, 2004-34, 2005-47, 2011-18, and 2013-29, Notice 2018-35, and Chief Counsel notice CC-2010-018 are obsolete for tax years beginning on or after Jan. 1, 2021. Taxpayers that relied on that obsoleted guidance should determine whether a change in method of accounting occurs once they cease to use that guidance.

Based on input from commenters, however, the IRS did not obsolete Rev. Proc. 2013-26, relating to a safe-harbor method of accounting for original issue discount on a pool of credit card receivables. The IRS stated in the preamble to the final regulations that it intends to modify the revenue procedure to make clear that the safe-harbor method does not apply to any specified fees, including specified credit card fees.

Effective dates

The final regulations generally apply for tax years beginning on or after Jan. 1, 2021. However, certain rules for specified fees that are not specified credit card fees apply for tax years beginning on or after Jan. 6, 2022.

Taxpayers and related parties may apply the final regulations in their entirety and consistently, to a tax year beginning after Dec. 31, 2017, and before Jan. 1, 2021, provided that, once applied to that tax year, the rules are applied in their entirety and consistently to all later tax years. Nonetheless, taxpayers and related parties may apply the rules in these final regulations that apply to specified credit card fees in their entirety and consistently, to a tax year beginning after Dec. 31, 2018, and before Jan. 1, 2021, provided that, once applied, the rules are applied in their entirety and consistently to all later tax years.

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

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