IRS addresses deferred revenue treatment in taxable stock acquisition
TAX BLOG |
In situations where the target is deferring revenue, a taxable stock acquisition may create an inconsistency between the total amount of revenue recognized under generally accepted accounting principles (GAAP) and the amount of revenue recognized for income tax purposes.
In general, for income tax purposes, a corporation may be eligible to defer the recognition of an advance payment for one year, provided the corporation is deferring the revenue in its audited financial statements. If the stock of the corporation is acquired pursuant to a taxable stock acquisition, GAAP will generally require the deferred revenue liability to be written down to the fair value of the future performance obligation. The write-down of deferred revenue for GAAP is not controlling for tax purposes, and the full amount of the advance payment must be recognized.
For example, assume that in 2015, a corporation receives $120 as an advance payment. On its audited financial statements, the corporation will recognize $40 of revenues in 2015, $60 in 2016, and $20 for 2017. During 2015, the corporation is acquired, creating a short taxable year. As of that date, the corporation had recognized only $20 of the revenue in its audited financial statements.
For GAAP purposes, if the fair value of the future performance obligation was determined to be $10, the opening balance sheet at the date of the acquisition would only reflect $10 of deferred revenue. The remaining $90 will never be recognized for GAAP. For income tax purposes, the full amount of the remaining deferred revenue ($100) is recognized in full during the short taxable year created upon acquisition.
Recently released guidance confirms the IRS’ view that a taxpayer is not able to escape the recognition of revenue through a transaction or change in fair market value for GAAP purposes, and buyers should be aware of the potential tax consequences when deferred revenue is acquired in such a situation.