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AICPA Submits Comments on Section 451(b) & (c) Regarding the Taxable Year of Income Inclusion

Proposed regulations that implement new section 451(b) & (c) provide procedures for a taxpayer to change its method of accounting and provide clarification related to proper revenue recognition.

Jul. 15, 2020

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Late last year, the Department of the Treasury and the IRS issued notices of proposed rulemaking and guidance related to section 451(b) and (c), which were added to the Internal Revenue Code as part of the Tax Cuts & Jobs Act (TCJA). The American Institute of CPAs (AICPA) has submitted comments regarding new section 451(b), the taxable year of income inclusion under an accrual method of accounting, and new section 451(c), regarding advance payment for goods, services and other items.

Proposed regulations that implement new section 451(b) & (c) provide procedures for a taxpayer to change its method of accounting and provide clarification related to proper revenue recognition.

In response to comments made by Treasury Secretary Steven Mnuchin that American companies would have ample liquidity throughout the coronavirus pandemic, the AICPA stated that it believes that preserving the principles of realization for the taxation of revenue to circumstances when a company has either earned, received, or has the right to receive income would provide, in effect, a liquidity boost for companies during this crisis.

The AICPA recommends that Treasury and the IRS provide guidance on the following issues related to new section 451(b) and (c):

  1. Provide criteria for taxpayers to determine when realization occurs 
    1. Realization for the sale of goods
    2. Realization for the use of property
  2. Provide an administrative safe harbor allowing taxpayers with certain applicable financial statements to adopt a “book percentage of completion method” of accounting
  3. Eliminate the presumption rule with respect to contingent payments in proposed regulation § 1.451-3
  4. Provide that “net revenue” is the appropriate amount of recognition under the applicable financial statement income inclusion rule
  5. Provide guidance addressing implications for taxpayers with alternating applicable financial statement and non-applicable financial statement years
  6. Expand the specified good rule with respect to advance payments in proposed regulation § 1.451-8
  7. Clarify when a taxpayer’s obligation with respect to advance payments is satisfied
  8. Clarify the applicable financial statement write-down rule