Rev Proc 2018-29, 2018-21 IRB
In a Revenue Procedure, IRS has provided a new automatic change in accounting method for taxpayers to use to conform with new financial accounting standards issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (New Standards). Under the New Standards, which concern the recognition of revenue from contracts with customers, an entity must recognize revenue, for financial statement purposes, for goods and services promised to customers in an amount that reflects what the entity expects to receive in exchange for those goods and services.
Background on changing accounting methods. Code Sec. 446(a) and Reg § 1.446-1(a)(1) provide that taxable income is computed under the method of accounting the taxpayer regularly uses to compute income in keeping the taxpayer’s books. Reg § 1.446-1(a)(4) requires a taxpayer to maintain accounting records that include the taxpayer’s regular books of account and other records and data necessary to support the entries on the taxpayer’s books of account and on the taxpayer’s return. A taxpayer using an accrual method of accounting accrues income when the right to receive income is fixed and the amount can be determined with reasonable accuracy (the all events test).
In most cases, a taxpayer that wishes to change its method of accounting must apply for and secure the prior consent of IRS. However, for some accounting method changes, IRS provides an automatic procedure for obtaining its consent to the change. In April 2017, IRS updated its list of accounting method changes to which IRS automatic procedures applied, and it issued an updated list in May 2018.
When a taxpayer changes its accounting method, Code Sec. 481(a) adjustments are generally required to be made to prevent items from being duplicated or omitted. However, in limited circumstances, a “cut-off” method can be used instead, where only the items arising on or after the beginning of the year of change are accounted for under the new accounting method.
Background on new financial accounting standards. On May 28, 2014, FASB and IASB jointly announced new financial accounting standards for revenue recognition, titled “Revenue from Contracts with Customers (Topic 606)”.
The new standards are effective for publicly-traded entities, certain not-for-profit entities, and certain employee benefit plans for annual reporting periods beginning after December 15, 2017. For all other entities, the new standards are effective for annual reporting periods beginning after December 15, 2018. Early adoption is allowed for reporting periods beginning after December 15, 2016. Since the joint announcement, FASB and IASB have revised the New Standards and provided guidance on how to implement the New Standards in certain situations.
Under the New Standards, an entity will recognize revenue for promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services based on the following five sequential steps:
- Identify the contracts with a customer;
- Identify the performance obligations in the contract;
- Determine the transaction price;
- Allocate the transaction price to the performance obligations; and
- Recognize revenue as the entity satisfies a performance obligation.
In Notice 2017-17, 2017-15 IRB 1074, IRS issued a proposed Revenue Procedure that would set out how a taxpayer may request automatic consent to change an accounting method for recognizing income when the change is made for the same tax year as the taxpayer adopts the New Standards. IRS also requested comments on the proposed guidance. (See “Proposed rules on accounting method changes relating to revenue recognition standards”.)
New guidance. Rev Proc 2018-29 provides procedures for taxpayers changing their method of accounting for the recognition of income for federal income tax purposes to a method for recognizing revenues described in the New Standards. In particular, Rev Proc 2018-29 modifies Rev Proc 2017-30 (which provides a list of automatic accounting method changes) to provide procedures under Code Sec. 446 and Reg. § 1.446-1(e) to obtain automatic IRS consent to change to an otherwise permissible accounting method that uses the New Standards to identify performance obligations, allocate transaction price to performance obligations, and/or consider performance obligations satisfied, if such method change is made for the tax year in which the taxpayer adopts the New Standards.
The accounting method change in Rev Proc 2018-29 may only be made in the taxpayer’s first, second, or third tax year ending on or after May 10, 2018.
In response to comments, Rev Proc 2018-29 allows for more book-tax conformity and allows taxpayers to easily file accounting method change requests associated with adopting the New Standards. Specifically, Rev Proc 2018-29’s new automatic accounting method change procedures apply rules similar to the small business exception in the proposed Revenue Procedure in Notice 2017-17 to more taxpayers, and provides taxpayers the option of implementing the accounting method change on either a cut-off basis or with a Code Sec. 481(a) adjustment. IRS intends to provide additional guidance on these issues if needed to improve the procedures contained in Rev Proc 2018-29 once IRS and taxpayers obtain more experience with the interaction of the New Standards with federal income tax accounting methods.
The accounting method change in Rev Proc 2018-29 applies to a taxpayer that wants to change its method of accounting for the recognition of income for federal income tax purposes to a method under the New Standards for:
- Identifying performance obligations,
- Allocating transaction price to performance obligations, and/or
- Considering performance obligations satisfied.
It does not apply to:
- A change in the manner in which the taxpayer identifies contracts or determines the transaction price, including the inclusion and exclusion of variable consideration in the transaction price, under the New Standards;
- A change in method of accounting for recognizing income that is made in a year that is different from the year that the taxpayer adopts the New Standards;
- A change in method of accounting that does not comply with Code Sec. 451 or other guidance;
- Any change in method of accounting that qualifies under another automatic change described in the List of Automatic Changes provided Rev Proc 2017-30 (or any successor), even if it is otherwise described in Rev Proc 2018-29; or
- Any change in the method of accounting for income from a long-term contract, unless the long-term contract is excepted from required use of the percentage-of-completion method by Code Sec. 460(e)(1).
TCJA implications. Rev Proc 2018-29 states that it is not intended to provide guidance for taxpayers changing their accounting method to comply with Code Sec. 451, as amended by the Tax Cuts and Jobs Act. Effective for tax years beginning after December 31, 2017, Code Sec. 451(b), as amended by TCJA, generally provides that for an accrual method taxpayer, the all events test with respect to any item of gross income (or portion thereof) will not be treated as met any later than when such item (or portion thereof) is taken into account as revenue in the taxpayer’s applicable financial statement, or such other financial statement as IRS specifies. Code Sec. 451(b), as amended by TCJA, is inapplicable to certain taxpayers, such as taxpayers that do not have an applicable financial statement or other financial statement specified by IRS. Code Sec. 451(c), as amended by TCJA, provides an elective method of accounting for an accrual method taxpayer that receives an advance payment during the tax year.
Comments requested. Rev Proc 2018-29 requests comments on future guidance that may be necessary as taxpayers begin to comply with the New Standards. IRS also request comments on future guidance to help taxpayers comply with Code Sec. 451, as amended by the TCJA.
Effective date. Except as otherwise provided below, Rev Proc 2018-29 is effective for a taxpayer’s first, second, or third tax year ending on or after May 10, 2018.
If before May 10, 2018, a taxpayer properly filed a Form 3115 under the non-automatic change procedures requesting IRS’s consent for a change in accounting method described in Rev Proc 2018-29, and the Form 3115 is pending with the national office on May 10, 2018, the taxpayer may choose to make the change in accounting method under the automatic change procedures in Rev Proc 2015-13 if the taxpayer is otherwise eligible to use Rev Proc 2018-29 and the automatic change procedures in Rev Proc 2015-13. The taxpayer must notify the national office contact person for the Form 3115 of the taxpayer’s intent to make the change in accounting method under the automatic change procedures in Rev Proc 2015-13 before the later of
- June 11, 2018, or
- The issuance of a letter ruling granting or denying consent for the change.
A taxpayer converting a Form 3115 to the automatic change procedures in Rev Proc 2015-13 for a change in accounting method described in Rev Proc 2018-29 must resubmit a Form 3115 that conforms to the automatic change procedures, with a copy of the national office letter sent acknowledging the taxpayer’s request to convert attached, by the earlier of
- The 30th calendar day after the date of the national office’s letter acknowledging the taxpayer’s request to convert, or
- The date the taxpayer is required to file the original Form 3115 under Rev Proc 2015-13, Section 6.03(1)(a)(i)(A).
For purposes of the eligibility rules in Rev Proc 2015-13, Section 5, the timely resubmitted Form 3115 will be considered filed as of the date the taxpayer originally filed the converted Form 3115 under the non-automatic change procedures in Rev Proc 2015-13.
For more information regarding these accounting method changes, contact Larson & Company today.
Source: Thomson Reuters Checkpoint Newsstand 5-11-18