The IRS recently issued Notice 2018-35 providing transitional tax accounting guidance on the treatment of “advance payments” under IRC Section 451(c). These rules were recently amended by the 2017 Tax Cuts and Jobs Act (TCJA).

Specifically, Section 451(c) now contains tax accounting rules like those contained in existing Rev. Proc. 2004-34, which allowed taxpayers to defer revenue recognition in connection with the receipt of certain advance payments. While Section 451(c) now expressly provides rules that are in fact similar to the guidance in Rev. Proc. 2004-34, there are some key statutory differences that will require the IRS to provide additional taxpayer guidance. The differences relate mainly to the definition of an “applicable financial statement” (that defers the revenue for book purposes), and the definition of an “advance payment.”

Therefore, until such additional IRS or Treasury guidance is issued, per Notice 2018-35, the IRS will continue to allow taxpayers that receive advance payments to rely on the rules in Rev. Proc. 2004-34. However, during this transition period, the IRS will continue to verify that taxpayers are properly applying Rev. Proc. 2004-34. In addition, and according to the IRS, the IRS also intends to waive the 5-year scope limitation, and allow taxpayers to make an automatic accounting method change for advance payments, even if they changed the method within the last 5 years.

Because of the importance of these changes, the IRS has requested that taxpayers to submit comments on suggestions for future guidance under amended Section 451(b) and (c). 

What does CohnReznick think?

We are encouraged to see the IRS provide some level of certainty to taxpayers until it can issue additional detailed tax guidance. By allowing clients to continue applying well understood deferral rules this should provide some certainty and reduce risk. However, taxpayers should remain alert to the fact that future IRS guidance of section 451(c) payments may change these transition rules, and specifically, for revenue items other than from goods or services, the final rules may likely receive tax accounting treatments very different than what was previously allowed. So stay tuned.

For any specific issues related to advance payments or this new guidance please contact:

Richard Shevak
[email protected]
862-245-5029

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