On Oct. 12, 2018, the IRS released proposed regulations (REG-104872-18) which remove Reg. section 1.451-5 in accordance with changes in the recent tax legislation (commonly referred to as the Tax Cuts and Jobs Act, or TCJA).
Reg. section 1.451-5 lets accrual method taxpayers defer recognition of advance payments for goods and long-term contracts. Under Reg. section 1.451-5, a taxpayer looks to accrual method rules and recognizes revenue no later than when the taxpayer’s financial statements record the advance payments as earned.
TCJA significantly altered revenue recognition rules, and IRS considers Reg. section 1.451-5 moot under the new rules. The TCJA’s conference report indicates that section 451(c) is, “intended to override any deferral method provided by Treasury Regulation section 1.451-5 for advance payments received for goods.” Accordingly, Reg. section 1.451-5 has little purpose in the post-TCJA code.
Under the proposed regulations, the rules of section 446 will apply to taxpayers who must change their methods of accounting due to the removal of Reg. section 1.451-5. The Treasury Department and IRS request comments on any necessary changes to procedural rules in section 446.
Taxpayers should consult their tax professionals to determine whether they are on a permissible method of deferring advance payments.
Check RSM’s Tax Reform Resource Center for the latest analysis on this and other developments related to tax reform.