August 26, 2021
2021-1572 New guidance on income recognition modifies procedures for obtaining automatic consent to change accounting methods In Revenue Procedure 2021-34 (issued August 12, 2021), the IRS provides long-awaited guidance for taxpayers to obtain automatic consent to change accounting methods to comply with final regulations under IRC Section 451 (TD 9941; see Tax Alert 2021-0062). Background The Tax Cuts and Jobs Act (TCJA) revised IRC Section 451(b) to provide that an accrual-method taxpayer will meet the all-events test for any item of gross income no later than when the taxpayer accounts for that item, or portion thereof, as revenue in its applicable financial statement (AFS). The final regulations define this as the AFS Income Inclusion Rule. Further, IRC Section 451(b) requires taxpayers to apply the AFS Income Inclusion Rule, rather than original issue discount (OID) timing rules, to certain specified fees, including credit card late fees, cash advance fees, and interchange fees. The TCJA also amended IRC Section 451(c) to allow an accrual-method taxpayer to use the deferral method of accounting for advance payments, effectively codifying the guidance provided in Revenue Procedure 2004-34. On September 9, 2020, the Treasury Department and IRS published proposed regulations under IRC Section 451. The proposed regulations include guidance on (1) the timing of income inclusion for taxpayers with an AFS using an accrual method of accounting (Prop. Reg. Section 1.451-3 under IRC Section 451(b)) and (2) advance payments for goods, services, and certain other items (Prop. Reg. Section 1.451-8 under IRC Section 451(c)). Taxpayers may generally choose to apply the proposed regulations, in their entirety and in a consistent manner, to tax years beginning after December 31, 2017, by filing one or more automatic method changes. On January 6, 2021, the Treasury Department and IRS published final regulations under IRC Section 451. The final regulations include guidance on (1) the timing of income inclusion for taxpayers with an AFS using an accrual method of accounting (Treas. Reg. Section 1.451-3 under IRC Section 451(b)); and (2) advance payments for goods, services, and certain other items (Treas. Reg. Section 1.451-8 under IRC Section 451(c)). The final regulations generally apply for tax years beginning on or after January 1, 2021. Taxpayers may choose to apply the final regulations, in their entirety and in a consistent manner, to tax years beginning before the effective date (December 30, 2020) or may continue to rely on the proposed regulations for tax years beginning after December 31, 2017, and before the effective date of the final regulations. A change to comply with the final regulations is a change in method of accounting. Revenue Procedure 2021-34 Revenue Procedure 2021-34 modifies Revenue Procedures 2019-43 (List of Automatic Changes) and 2015-13 to provide new automatic method changes for a taxpayer to change its accounting methods to comply with Treas. Reg. Sections 1.451-3, 1.451-8, or 1.1275-2(l), and also revises certain existing automatic method changes. In modifying the existing method changes, section 3 of Revenue Procedure 2021-34: - Modifies section 16.11 (i.e., a change in the timing of income recognition resulting from adoption of ASC 606) to clarify it is not a change to comply with IRC Section 451(b) or (c) or the accompanying regulations
- Modifies section 16.12 to remove the previous automatic change to comply with IRC Section 451(b) but keeps, with certain modifications, the automatic changes to comply with Prop. Reg. Sections 1.451-3, 1.451-8, or 1.1275-2(l) and adds a new automatic method change to comply with Treas. Reg. Sections 1.451-3, 1.451-8, and/or 1.1275-2(l) (see chart below for more details)
- Modifies the automatic change for advance payments under section 16.07 (i.e., a change to comply with Revenue Procedure 2004-34 for the treatment of advance payments) by making the change inapplicable for a year of change beginning on or after January 1, 2021
- Temporarily waives the eligibility rule in section 5.01(f) of Revenue Procedure 2015-13 (i.e., the rule restricting changes under the automatic consent procedures if the taxpayer made a change for the same item in the prior five tax years, including the year of change) for certain inventory changes if they are made in connection with the new automatic changes to comply with Treas. Reg. Sections 1.451-3 and 1.451-8 (modifying sections 12.01, 12.02, 22.05, 22.11, and 22.18 of Revenue Procedure 2019-43)
- Modifies the automatic change in overall method of accounting from the cash method to an accrual method in section 15.01 for taxpayers with an AFS
- Removes the automatic change for credit card late fees in section 16.06
- Removes the automatic change for credit-card-cash-advance fees in section 16.08
- Modifies the automatic change for OID on a pool of credit card receivables in section 30.02 (proportional method), consistent with the modifications made by Revenue Procedure 2021-35
Additionally, Revenue Procedure 2021-34 adds several new automatic method changes to enable taxpayers to obtain IRS consent to change its method of accounting to comply with specific subsections of Treas. Reg. Sections 1.451-3 or 1.451-8, as detailed in the following chart: Designated change number (DCN) | Section of Revenue Procedure 2019-43 | Description of change | 250 | 16.12(2)(a)(iii)(A) | Change to comply with the AFS income inclusion rule in Treas. Reg. Section 1.451-3(b) under which the taxpayer determines the amount of an item of gross income that is treated as "taken into account as AFS revenue" by making the AFS revenue adjustments provided in Treas. Reg. Section 1.451-3(b)(2)(i) (including a change for specified credit card fees under Treas. Reg. Sections 1.451-3(j)(2) and 1.1275-2(l)) | 250 | 16.12(2)(a)(iii)(B) | Change to comply with the AFS income-inclusion rule in Treas. Reg. Section 1.451-3(b) under which the taxpayer determines the amount of the item of gross income that is "taken into account as AFS revenue" by making the AFS revenue adjustments provided in Treas. Reg. Section 1.451-3(b)(2)(ii) (including a change for specified credit card fees under Treas. Reg. Sections 1.451-3(j)(2) and 1.1275-2(l)) (Alternative AFS Revenue Method) | 250 | 16.12(2)(a)(iii)(F) | Change to comply with the transaction price allocation rules in Treas. Reg. Section 1.451-3(d) | 250 | 16.12(2)(a)(iii)(G) | Change to a method of accounting described in Treas. Reg. Section 1.451-3(h)(4) when a taxpayer's AFS covers mismatched reportable periods | 251 | 16.12(2)(a)(iii)(C) | Change to apply the AFS cost offset method in Treas. Reg. Section 1.451-3(c) to determine the amount of an item of gross income from the sale of inventory that must be included in gross income under the AFS income inclusion rule in Treas. Reg. Section 1.451-3(b) | 251 | 16.12(2)(a)(iii)(D) | Change from applying a cost offset method, including the AFS cost offset method in Treas. Reg. Section 1.451-3(c), to not applying a cost offset method to determine the amount of an item of gross income from the sale of inventory that must be included in gross income under the AFS income inclusion rule in Treas. Reg. Section 1.451-3(b) | 252 | 16.12(2)(a)(iv)(B) | Change to the deferral method provided in Treas. Reg. Section 1.451-8(c) | 252 | 16.12(2)(a)(iv)(C) | Change to the specified goods IRC Section 451(c) method described in Treas. Reg. Section 1.451-8(f) to treat payments that otherwise qualify for the specified goods exception, as defined in Treas. Reg. Section 1.451-8(a)(1)(ii)(H), as advance payments and account for such payments either under the full inclusion method provided in Treas. Reg. Section 1.451-8(b) or under the deferral method provided in Treas. Reg. Section 1.451-8(c) | 252 | 16.12(2)(a)(iv)(G) | Change to a method of accounting described in Treas. Reg. Section 1.451-8(c)(7), which refers to the methods described in Treas. Reg. Section 1.451-3(h)(4), when a taxpayer's AFS covers mismatched reporting periods | 252 | 16.12(2)(a)(iv)(H) | Change to comply with the payment allocation rules in Treas. Reg. Section 1.451-8(c)(8) | 253 | 16.12(2)(a)(iv)(D) | Change to apply the advance-payment-cost-offset method in Treas. Reg. Section 1.451-8(e) to determine the amount of an advance payment from the sale of inventory that must be included in gross income under either the full inclusion method in Treas. Reg. Section 1.451-8(b) or the deferral method in Treas. Reg. Section 1.451-8(c), as applicable | 253 | 16.12(2)(a)(iv)(E) | Change from applying a cost offset method, including the advance payment cost offset method in Treas. Reg. Section 1.451-8(e), to not applying a cost offset method to determine the amount of an advance payment from the sale of inventory that must be included in gross income under either the full inclusion method in Treas. Reg. Section 1.451-8(b) or the deferral method in Treas. Reg. Section 1.451-8(c), as applicable | 254 | 16.12(2)(a)(iv)(A) | Change to the full inclusion method provided in Treas. Reg. Section 1.451-8(b) | 255 | 16.12(2)(a)(iii)(E) | Change to comply with Treas. Reg. Section 1.451-3(c)(5)(ii) as a result of a concurrent cost-offset-related inventory method change, as defined in section 5.06 of Revenue Procedure 2015-13 (or successor), or because the taxpayer determines its cost of goods in progress offset by reference to costs that the taxpayer has impermissibly capitalized and/or allocated under its present method of accounting for inventory | 255 | 16.12(2)(a)(iv)(F) | Change to comply with Treas. Reg. Section 1.451-8(e)(8)(ii) as a result of a concurrent cost-offset-related inventory method change, as defined in section 5.06 of Revenue Procedure 2015-13 (or successor), or because the taxpayer presently determines its cost of goods in progress offset by reference to costs that the taxpayer has impermissibly capitalized and/or allocated under its present method of accounting for inventory |
Note: These changes generally apply to taxpayers with an AFS; several of these automatic method changes are also available for taxpayers without an AFS. Effective date Generally, Revenue Procedure 2021-34 is effective for Forms 3115 filed on or after August 12, 2021. The IRS National Office will return any currently pending Form 3115 filed with the National Office on or before August 12, 2021, under the nonautomatic procedures of Revenue Procedure 2015-13 for a post-TCJA tax year (i.e., beginning after December 31, 2017) if the Form 3115 is eligible for the automatic change procedures described in section 3 of Revenue Procedure 2021-34. A taxpayer that properly filed a duplicate copy of Form 3115 before August 12, 2021, under the automatic change procedures of Revenue Procedure 2015-13 for a change in method of accounting that, as of August 12, can no longer be filed under the automatic change procedures due to changes made by Revenue Procedure 2021-34 may still make the change under the automatic procedures by attaching the original Form 3115 to its tax return. Implications As Revenue Procedure 2021-34 is effective for Forms 3115 filed on or after August 12, 2021, taxpayers planning to file one or more income recognition method changes for their 2020 tax returns (but that have not yet filed the duplicate copy with the IRS in Ogden, Utah) must carefully consider the revisions that Revenue Procedure 2021-34 made to the existing automatic method changes in Revenue Procedure 2019-43. Taxpayers should consider their options for filing method changes for the 2020 tax year, especially when considering the need to timely comply with the final regulations by their effective date (i.e., tax years beginning on or after January 1, 2021). Taxpayers planning to early adopt the final regulations for their 2020 tax years should review the plethora of method changes that are now available to them, including the relevant provisions related to IRC Section 481(a) adjustments, audit protection and eligibility waivers. Taxpayers that intend to timely adopt the final regulations for their 2021 tax year should plan to carefully consider any prior method changes, changes in book recognition as well as positions taken on their 2020 tax return with respect to items of income for purposes of evaluating any method changes necessary to comply with the final regulations. . For additional discussion on Revenue Procedure 2021-34, please join us for an EY Thought Center webcast on Monday, September 13, 2021, from 1:00-2:00 pm EST. ——————————————— Contact Information
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