IRS has issued proposed regs that would remove Reg. §1.451-5, which generally allows accrual method taxpayers to defer the inclusion of income for certain advance payments, because a provision of the Tax Cuts and Jobs Act (TCJA) overrides the provisions of that reg.
Background. In general, Code Sec. 451 provides that the amount of any item of gross income is included in gross income for the tax year in which it is received by the taxpayer, unless, under the method of accounting used in computing taxable income, the amount is to be properly accounted for as of a different period.
Reg. § 1.451-5 generally allows accrual method taxpayers to defer the inclusion of income for advance payments for goods, and for sales for which the taxpayer uses the long-term contract method, until the tax year in which they are properly included in income under the taxpayer’s method of accounting for federal income tax purposes if that method results in the advance payments being included in gross income no later than when the advance payments are recognized in gross receipts under the taxpayer’s method of accounting for financial reporting purposes.
The TCJA created a new Code Sec. 451(c). New Code Sec. 451(c) generally requires an accrual method taxpayer that receives any advance payment described in Code Sec. 451(c)(4) during the tax year to include the advance payment in income in the tax year of receipt or make an election to: (1) include any portion of the advance payment in income in the tax year of receipt to the extent required under new Code Sec. 451(b); and (2) include the remaining portion of the advance payment in income in the following tax year. The election to defer advance payments of goods and services under new Code Sec. 451(c) is similar to the rules regarding the treatment of advance payments for goods, services, and other specified items provided in Rev Proc 2004-34, 2004-1 CB 991.
Under Code Sec. 446(e), taxpayers must obtain IRS’s consent before changing a method of accounting for federal income tax purposes. In most cases, a taxpayer that wishes to change its accounting method must apply and secure the prior consent of IRS. For some accounting method changes, IRS provides an automatic procedure for obtaining its consent to the change.
IRS proposes to remove reg. In the proposed reg, IRS proposes to remove Reg. §1.451-5. In addition, the proposed regs would remove references to Reg. §1.451-5 that are contained in other regs. IRS notes that new Code Sec. 451(c) and its election to defer advance payments override the deferral method provided by Reg. §1.451-5.
The rules of Code Sec. 446 regarding changes in methods of accounting would apply to taxpayers changing a method of accounting for advance payments from a method described in Reg. §1.451-5 to another method. IRS requests comments on whether any changes to existing procedural rules under Code Sec. 446 for changes in methods of accounting are necessary or desirable as a result of removing Reg. §1.451-5. (Preamble)
Effective date. The removal of the regs would apply as of the date the Treasury decision adopting the proposed regs is published in the Federal Register. (Preamble)