No acceleration to typical interest income under section 451(b)

Sep 10, 2019
Sep 10, 2019
0 min. read

OID acceleration would focus on certain credit card fees

In newly issued proposed regulations addressing income recognition under section 451(b) of the Tax Code, Treasury and the IRS have left most interest-related items unaffected. Following the lead of Congress, the Proposed Regulations do make a point of accelerating the inclusion into income of credit card fees, such as cash advance fees, late fees and interchange fees (Specified Credit Card Fees), as well as similar fees (Other Specified Fees, and together with Specified Credit Card Fees, Specified Fees). Taxpayers should consider the tax impact of this rule if they make credit card loans or similar loans or receive debit card interchange fees or similar fees.


Congress enacted section 451(b) in 2017, providing for more uniform timing rules for inclusion of advance payments into income, as discussed in our  addressing the proposed regulations. For taxpayers with an “applicable financial statement” (AFS), section 451(b) generally requires inclusion of items in a taxpayer’s income no later than the time they are included on the taxpayer’s AFS. However, this section 451(b) rule does not apply to items that are subject to ‘special methods of accounting’ for federal income tax purposes.

Original issue discount (OID) is excepted from this special accounting methods rule under the Code. Congress’ stated purpose in excepting OID was to stop the deferred recognition of certain credit card fees into income by virtue of their treatment as OID. See H.R. Rep. No. 115-466, at 427-429 (2017). These fees may include cash advance fees, late fees and interchange fees.

Proposed regulations’ approach

Before the proposed regulation under section 451(b), it was not clear whether Treasury and the IRS would look to extend section 451(b) to other OID items. Many interest items are treated as OID under the Tax Code; most are not similar to the credit card fees Congress expressed concern about. Treasury and the IRS agreed with taxpayer’s views that section 451(b) was not intended to change the OID income timing rules, other than with respect to Specified Fees. They similarly agreed that extending section 451(b) to OID in general would result in significant administrative burden and very little additional tax revenue. Accordingly, the proposed regulations would apply section 451(b) to Specified Fees, but not to other OID items.

Effective date

The proposed regulations generally would apply before taxable years beginning after the date the regulations are finalized. However, for Other Specified Fees, the proposed regulations apply to taxable years beginning one year or more after the date the regulations are finalized. Early adoption of the proposed regulations is permitted: for items other than Specified Fees, for taxable years beginning after Dec. 31, 2017 and for Specified Credit Card Fees, only for taxable years beginning after Dec. 31, 2018.

Market discount

With respect to market discount, which arises on a purchase of a debt instrument at a discount after the instrument was issued, the proposed regulations follow the approach set out in Notice 2018-80. Under that approach, accrued market discount is not includible in income under section 451(b) (As discussed in our prior Alert available


Most taxpayers can expect that their tax accounting for OID and market discount will not be materially affected by section 451(b), based on the proposed regulations. However, taxpayers receiving fees with respect to credit or debit cards, or fees similar to the credit card fees targeted by Congress, should consider the effect of section 451(b) on the timing of their OID income items.

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