Sec. 451 rules are finalized

By Sally P. 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-104870-18), with certain revisions made in response to written comments and testimony at a public hearing on the proposed regulations.

Sec. 451(b) provides that for an accrual-method taxpayer with an applicable financial statement (AFS) or other specified financial statement, the all-events test with respect to any item of gross income, or portion thereof, is not treated as met any later than when such item, or portion thereof, has been taken into account as revenue in the AFS or other specified financial statement (the AFS income-inclusion rule). 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 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 application of the AFS income-inclusion rule.

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.

Applicability 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.

Alternatively, a taxpayer may rely on the proposed regulations for tax years beginning after Dec. 31, 2017, (or Dec. 31, 2018, in the case of specified credit card fees) and before Jan. 1, 2021.

However, in the case of a specified fee that is not a specified credit card fee, a taxpayer may not choose to apply the final regulations to, and may not rely on the proposed regulations for, a tax year beginning after Dec. 31, 2018, and before Jan. 6, 2022.

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