Proposed revenue procedure on method changes for revenue recognition
TAX ALERT |
On March 28, the IRS and Treasury Department (hereinafter, the government) issued Notice 2017-17 requesting comments on a proposed revenue procedure for taxpayers who for federal income tax purposes request consent to change a method of accounting for recognizing income in order to comply with the new financial accounting standards (Topic 606) for recognizing revenue (hereinafter, the new standards). To the extent adoption of the new standards changes the timing of recognizing income for federal income taxes, a taxpayer may be required to file an accounting method change with the IRS. The proposed guidance is limited to taxpayers requesting consent within the same year in which they adopt the new standards—defined as a qualifying same-year method change—to change to a method of accounting that complies with section 451 of the Internal Revenue Code.
The Financial Accounting Standards Board and the International Accounting Standards Board issued the new standards in May 2014 (see Revenue recognition: Overview of ASC 606 whitepaper). 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 Dec. 15, 2017. For all other entities, the new standards are effective for annual reporting periods beginning after Dec. 15, 2018. However, early adoption is allowed for reporting periods beginning after Dec. 15, 2016.
A qualifying same-year method change made pursuant to the proposed guidance will be requested under automatic change procedures on a Form 3115, Application for Change in Accounting Method. Applications filed under automatic change procedures are generally due by the tax return due date, including extensions, and do not include a user fee. The proposed guidance also indicates that these changes will require the computation of a section 481(a) adjustment, expressly indicating that changes covered by the proposed guidance will not be made on a cut-off method. There is however a proposal for small taxpayers (defined as a separate and distinct trade or business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the three preceding tax years) to implement the changes under a cut-off approach (no section 481(a) adjustment).
The proposed guidance communicates the government’s intention to help taxpayers transition to the new standards in the year of adoption, but that the government will require taxpayers to default to current guidance if they choose to address the federal income tax implications in a non-adoption year. Such requests made pursuant to current guidance would still be filed on a Form 3115, but many of the applications would likely be filed under nonautomatic change procedures, which are due within the year of change and require a user fee.
The government issued an earlier notice (Notice 2015-40) in which it requested comments on the broader aspects of conformity between the new standards and federal income tax rules. Few comments were received however. Thus, while the proposed guidance is limited to procedures for taxpayers to obtain consent for qualifying same-year method changes, the government continues to invite comments on these broader unanswered issues.
The government has requested all comments by July 24, 2017. Therefore, it seems unlikely that the government will issue finalized guidance before the second half of the year. If taxpayers decide to early adopt the new standards, they may face a tight window in which to apply final guidance once it is available.
Taxpayers that have begun or will eventually begin to implement the new standards should consult their tax advisors regarding the potential tax implications.