IRS issues revenue procedure on TCJA revenue recognition rules

| 9/9/2021
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The IRS issued Revenue Procedure 2021-34 to modify the list of automatic accounting method changes in Revenue Procedure 2019-43. Revenue Procedure 2021-34 also includes long-awaited procedural guidance to implement final regulations for revenue recognition under IRC Sections 451(b) and 451(c), which were enacted by the Tax Cuts and Jobs Act of 2017 (TCJA).

Background

The rules under IRC Section 451(b) provide that accrual method taxpayers with an applicable financial statement (AFS) must recognize an item of gross income no later than when the item is included in revenue in the taxpayer’s AFS (the AFS inclusion rule). The rules under IRC Section 451(c) provide that accrual method taxpayers that receive advance payments may recognize income under either the deferral method or the full inclusion method, essentially codifying prior guidance under Revenue Procedure 2004-34.

The revenue recognition final regulations, which were published on Jan. 6, 2021, clarify the definition of AFS revenue. In addition, the final regulations provide an optional offset against both AFS revenue under IRC Section 451(b) and income from advance payments under IRC Section 451(c) for costs related to the future sale of inventory, among other changes.

The final regulations generally are effective for taxable years beginning on or after Jan. 1, 2021. However, taxpayers may apply the rules in the final regulations to a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021, if the rules are applied in their entirety and in a consistent manner. Alternatively, taxpayers generally may rely on the proposed regulations for taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021.

Revenue Procedure 2021-34

Following are highlights of some of the changes included in Revenue Procedure 2021-34. 

New automatic procedures. Revenue Procedure 2021-34 modifies Section 16.12 of Revenue Procedure 2019-43 to provide new automatic procedures for accrual method taxpayers to apply the final regulations for revenue recognition. Revenue Procedure 2021-34 also makes significant changes to the existing procedures to apply the proposed regulations for revenue reconciliation. Highlights of some of the new automatic changes include:

Taxpayers with an AFS can do one of the following:

  • Change their method of accounting under proposed regulation Section 1.451-3 for taxable years beginning before Jan. 1, 2021.
  • Change their method of accounting for advance payments under proposed regulation Section 1.451-8(a) or (c) for taxable years beginning before Jan. 1, 2021.
  • Make one or more changes in their method of accounting under final regulation 1.451-3(b), including a change to comply with the AFS inclusion rule, a change in the manner of determining AFS revenue, or a change to apply or not apply the cost offset method.
  • Make a change to their method of accounting for advance payments under final regulation 1.451-8, including a change to the full inclusion method, a change to the deferral method, or a change to apply or not apply the cost offset method.

Taxpayers without an AFS can do one of the following:

  • Change their method of accounting for advance payments under proposed regulation Section 1.451-8(a) or (d) for taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021.
  • Change their method of accounting for advance payments under final regulation Section 1.451-8.
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Cutoff and streamlined methods. Revenue Procedure 2021-34 allows certain changes to be made on a cutoff basis rather than with an IRC Section 481(a) adjustment, although complex netting rules also are required when multiple changes are made with respect to the sale of inventory items.

Additionally, certain taxpayers may use streamlined method change procedures to adopt the final regulations whereby the requirement to file a Form 3115, “Application for Change in Accounting Method,” is waived. The streamlined method generally is available only if either of the following applies:

  • The taxpayer has average aggregate annual gross receipts of $25 million or less (adjusted for inflation) for the three prior taxable years.
  • Each of the changes in method of accounting results in no IRC Section 481(a) adjustment.

Inventory-related changes. Revenue Procedure 2021-34 also modifies Revenue Procedure 2015-13 to require taxpayers that use the AFS cost offset method or the advance payment cost offset method from the final regulations and that want to make a change in method of accounting for inventory or any other liability that could affect their cost of goods in progress offset to also make a change under the final revenue recognition regulations.

Additionally, modifications were made to eligibility requirements for inventory-related automatic accounting changes under Revenue Procedure 2019-43, allowing more taxpayers to qualify under the automatic change procedures. For instance, a new temporary automatic method change was added for taxpayers presently on an impermissible method of recovering the cost of inventory incurred in a taxable year prior to the taxable year in which ownership of the inventory is transferred to the customer to offset income inclusions under IRC Section 451(b) or Section 451(c).

Looking ahead

Revenue Procedure 2021-34 generally is effective for Form 3115s filed on or after Aug. 12, 2021, and may affect method changes to be filed for the 2020 tax year. Taxpayers should evaluate whether they want to early adopt the final regulations for their 2020 tax year and, if so, which provisions they want to apply as the final regulations provide several options. Taxpayers also should evaluate eligibility for method changes to apply the proposed regulations and whether such changes would be beneficial.

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