Today, the IRS released two sets of proposed regulations under IRC 451 — one under IRC Section 451(b) (REG-104870-18) and another under IRC Section 451(c) (REG-104554-18). Both regulations are updates to IRC Section 451 as amended by Public Law No. 115-97, which is known as the "Tax Cuts and Jobs Act."

Highlights of Prop. Reg. Section 1.451-3 under IRC Section 451(b) (Inclusion not later than for financial accounting purposes) include the following:

• Transactions could be treated differently for tax and AFS purposes (e.g., rental agreements treated as a lease for tax purposes but as a sale/financing for applicable financial statement (AFS) purposes), resulting in income recognition differences between book and tax.
• For multi-year contracts, a taxpayer must take into account the cumulative amount of income previously included in a prior year when determining current-year revenue recognition.
• "Transaction price" is clarified (i.e., the amount of income a taxpayer expects to receive), providing that contingent revenue is not recognizable for future occurrences beyond the tax year. However, the transaction price may not be reduced for amounts subject to IRC Section 461 (expense recognition), such as allowances, adjustments, refunds, rewards, chargebacks or cost of goods sold (COGS).
• Contracts with multiple "performance obligations" (e.g., a sales contract of goods with related services) should allocate the transaction price consistent with the taxpayer's AFS allocation. However, the regulations provide a definition for tax purposes of performance obligation that may or may not conform to a book performance obligation (e.g., implied warranty).
• The definition of revenue is clarified to broadly include all items of income under IRC Section 61. The Government goes on to clarify that this is a tax-based definition, so certain amounts that are only recognized in an adjustment to retained earnings should nevertheless be included in taxable income.
• Special rules are provided for income related to debt instruments (e.g., credit card fees).

Highlights of Prop. Reg. Section 1.451-8 under IRC Section 451(c) (Advance payments for goods, services, and certain other items) include the following:

• A definition of an advance payment similar to Revenue Procedure 2004-34 is adopted and includes: goods, services, use/license/lease of intellectual property, sales/lease/license of computer software, gift cards sales, etc.
• Credit card loyalty points have been explicitly excluded from the definition of advance payments but loyalty programs (e.g., airline miles) are provided as an example of a possible qualifying advance payment.
• The Government declined to provide an accelerated cost offset (e.g., deductions for rebates, refunds, COGS) prior to when the liability for such items is incurred under IRC Section 461.
• An estimated 20,000-40,000 taxpayers will be required to file a Form 3115 to change to the deferral method described in Prop. Reg. Section 1.451-8(c). Taxpayers may, however, continue to rely on Revenue Procedure 2004-34 (under the previously released IRS Notice 2018-35) until method change procedures are issued.

Taxpayers must comply with these rules for tax years beginning on or after the date the final regulations are published in the Federal Register. However, taxpayers may rely on the proposed regulations (in full) for tax years beginning after December 31, 2017. Certain exceptions to the effective date rules for Prop. Reg. Section 1.451-3 apply for specified credit card fee transactions.

Tax Alerts on the proposed regulations and other guidance are forthcoming. An invitation to an upcoming webcast on the proposed regulations will be sent soon.