The Tax Cuts and Jobs Act (“TCJA”) may have lowered the corporate tax rate but it also created a new rule causing many taxpayers to recognize taxable income sooner than they used to.
Under the old law, a company could defer revenue recognition for a number of acceptable reasons. However, under the new rule, revenue will be taxable no later than the year it is recognized on the company’s financial statements. In addition, the TCJA modified rules regarding advance payments and the tax treatment of certain credit card fees. A taxpayer who uses an accrual method of accounting, and has an applicable financial statement covering the entire taxable year, must follow these new rules.
A number of notices, revenue procedures and proposed regulations were issued to implement these changes. However, when several final regulations were issued in 2020, most of the previously issued notices and revenue procedures became obsolete for taxable years beginning on or after January 1, 2021. Therefore, a taxpayer that relied on the now obsoleted guidance must determine whether there is a change in the method of accounting after transitioning from the obsoleted guidance to comply with the final regulations. If so, the taxpayer must file a Form 3115, Application for Change in Accounting Method, to apply the final regulations to its tax return. Unfortunately, you can’t file an amended return to apply the final regulations.
On August 12, 2021, the Internal Revenue Service (IRS) issued Rev. Proc. 2021-34 to update automatic consent procedures for taxpayers to change their method of accounting to comply with final regulations with respect to:
- The timing of income recognition
- The timing of incurring inventory costs
- Advance payments for goods, services and certain other items
- Special rules relating to debt instruments
On the same day, Rev. Proc. 2021-35 was also released to reflect changes made to the treatment of certain credit card fees. Rev. Proc. 2021-34 is generally effective for Forms 3115 filed on or after August 12, 2021, and Rev. Proc. 2021-35 is effective on or after August 12, 2021.
Revenue Procedure 2021-34
Rev. Proc. 2019-43 is the current list of automatic accounting method changes. Rev. Proc. 2021-34 modifies this list to provide procedures for a taxpayer to obtain automatic consent to change its methods of accounting to comply with the final regulations. In general, a taxpayer must secure the IRS’s consent before changing its accounting method. Consent is granted in two ways: automatic and non-automatic. In most cases, taxpayers would prefer to file under the automatic change procedures because consent is automatically granted upon filing the Form 3115 and no user fee is required. On the other hand, a taxpayer applying for the method change under a non-automatic change procedure must request consent first before making the change, and a user fee is required. It is a time-consuming and costly process.
Rev. Proc. 2021-34 also modifies Rev. Proc. 2015-13, which sets forth the application procedures for timely filing a change in method of accounting listed in Rev. Proc. 2019-43. This is important to know because some of the changes in methods of accounting can no longer be filed under the old procedures in Rev. Proc. 2015-13.
Rev. Proc. 2021-35
Rev. Proc. 2021-35 was released with Rev. Proc. 2021-34 to clarify that the proportional method no longer applies to a specified credit card fee. Pursuant to that change, a taxpayer that is already using the proportional method of accounting is required to remove any specified credit card fees from its pools of credit card receivables by filing Form 3115 under Rev. Proc. 2021-34.
These regulations and new revenue procedures are complex and can be confusing. Count on your Friedman LLP advisor to make sure your revenue recognition method is compliant and tax efficient.
