The IRS issued Rev. Proc. 2021-34 on Aug. 12 providing much-anticipated procedural guidance for taxpayers wishing to comply with the final revenue recognition regulations issued under Section 451. Taxpayers may use the procedures to early adopt the final regulations on original returns filed for tax years beginning before Jan. 1, 2021. They are generally effective immediately and are applicable for Forms 3115 filed on or after Aug. 12, 2021.
Section 451(b) was amended by the Tax Cuts and Jobs Act to generally require that taxpayers recognize income no later than when it is recognized in their applicable financial statements (AFS), and final regulations were issued on the rules in December of 2020. Rev. Proc. 2021-34 modifies the list of automatic changes in Rev. Proc. 2019-43 for changes in methods of accounting to comply with the final regulations under Treas. Reg. Secs. 1.451-3 and 1.451-8. Additionally, the revenue procedure permits taxpayers to make certain automatic changes under Sections 263A, 461 and 471 if those changes are made concurrently with a change to adopt the final Section 451 regulations.
These rules contain extensive provisions to implement or change to the various accounting methods available under the final Section 451 regulations. Some of the more significant provisions relate to the filing of accounting method changes to:
- Comply with the general AFS inclusion rule or the alternative AFS revenue method
- Apply, or discontinue application of, the AFS cost offset method
- Make concurrent cost offset related revenue recognition and inventory method changes
- Comply with the transaction price allocation rules
- Implement proper methods for taxpayers with mismatched financial statement and tax reporting periods
- Implement the deferral or full inclusion methods for advance payments
- Follow the proposed Section 451 regulations for taxable years beginning before Jan. 1, 2021
The guidance also contains detailed procedures relating to the manner in which taxpayers will make the aforementioned changes including, but not limited to, the following:
- Computation of Section 481(a) adjustments, including special-netting and spread-period rules
- Method changes required or allowed to be made on a cut-off basis
- Streamlined method changes that do not require the filing of a Form 3115 for certain changes to comply with the final regulations
- Modification of the scope and eligibility rules surrounding the filing of automatic changes, including the waiver of the five-year scope limitation in certain instances.
- Audit protection, including for taxpayers filing while under IRS exam
- Addition of many new designated automatic accounting method change numbers (DCNs) along with the modification of several existing DCNs
Next steps
As stated above, Rev. Proc. 2021-34 is effective immediately. As such, taxpayers in the process of filing a change in method of accounting relating to revenue recognition should thoroughly review the revenue procedure to confirm that their filing complies with the new procedural rules. The guidance brings additional complexities to the intricate procedural rules existing today and creates further complications through the addition, deletion and modification of DCNs.
Additional details relating to these final revenue recognition regulations and the new procedural rules will be covered in a forthcoming article.
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