United States

Accounting methods in the 2017-2018 Priority Guidance Plan Q2 update

TAX ALERT  | 

On Wednesday, Feb. 7, 2018, the Treasury released the second quarter update to the 2017-2018 Priority Guidance Plan (PGP). The PGP announces which guidance projects the Treasury and IRS hope to complete during the current guidance year (July 1, 2017 through June 30, 2018). This second quarter update is notable as it is the first PGP update since Congress passed the new 2017 tax law.

The Q2 update contains several changes to the initial 2017-2018 plan. Counted among these are the following accounting methods items:

  •  Computational, definitional and other guidance under new §163(j)

Section 163(j) contains the new interest expense limitation that passed as a part of the new tax law. Guidance issued under this section will be relevant to cost recovery accounting methods. Whether or not a company is subject to this interest expense limitation affects both the qualification for bonus depreciation and the applicability of the alternative depreciation system.

  • Guidance on new §168(k)

Section 168(k) contains the provisions governing bonus depreciation. These provisions were overhauled by the new tax law including, most notably, the increase in the applicable bonus percentage to 100 percent and now includes some used property.

  • Guidance adopting new small business accounting method changes under §§263A, 448, 460, and 471

The new tax also created or replaced small business exceptions for various accounting methods. In doing so, Congress utilized a consistent gross receipts threshold of $25,000,000, a figure significantly higher than previous thresholds. Accounting methods affected include the uniform capitalization (UNICAP) rules, the limitations on the use of the cash method of accounting, the percentage of completion method and the requirement to maintain inventories. Guidance issued in this area should assist newly qualified small businesses to take advantage of less onerous accounting methods.

  • Definitional and other guidance under new §451(b) and (c)

Section 451 contains the general rules governing the timing of income recognition for tax purposes. Paragraph (b) of that section contains the newly-passed financial statement conformity rule for requiring accrual method taxpayers to recognize income for tax purposes no later than the year recognized on an applicable financial statement. The new paragraph (c) contains a partial codification of the advanced payment rules of Rev. Proc. 2004-34.

In addition to the above, the following notable items were also included in the Q2 changes:

  • Computational, definitional and anti-avoidance guidance under new §199A (the new deduction for qualified business income)
  • A reference to the already-released Rev. Proc. 2017-59, which modified Rev. Proc. 2015-13 to include a 15-year adjustment period for accounting method changes related to elections under §404A, Deduction For Certain Foreign Deferred Compensation Plans

It is also helpful to note the planned guidance items have continued, unchanged, within the PGP’s Near-Term Burden Reduction section. This sub-list of the PGP contains the IRS and Treasury’s top, near-term priorities. Included among these top priorities were

  • Providing guidance under §170(e)(3) regarding charitable contributions of inventory.
  • Issuing final regulations under §263A regarding the inclusion of negative amounts in additional §263A costs. These ‘negative additionals’ refer to adjustments made to a taxpayer’s UNICAP calculation in order to remove costs capitalized for book purposes that are currently deductible for tax purposes. Proposed regulations on negative additional §263A costs were released in Sept. of 2012.

The full text of the second quarter update to the 2017-2018 Priority Guidance Plan is available on the IRS website.

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