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Proposed revenue recognition regs offer clarity

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Proposed revenue recognition regs offer clarity The IRS released long-awaited proposed regulations that provide rules for accrual method taxpayers regarding the acceleration of income and the deferral of advance payments for goods, services, and certain other items.

The IRS also issued companion guidance that provides automatic consent procedures to change methods of accounting to early adopt the proposed regulations, generally with audit protection.

General rules for accrual method taxpayers regarding the acceleration of income under Section 451(b) are provided, defining many of the terms and concepts used for both sets of proposed regulations, including:

  • Examples that illustrate the acceleration of unbilled receivables for partially-performed contracts not only for services but also for goods
  • Rules that require acceleration of gross receipts rather than gross income by not allowing costs to offset revenues if the costs have not been incurred
  • An expanded definition of AFS that covers more foreign entities.
  • A rule that limits how broadly Section 451(b) applies to OID.

The proposed regulations on deferral of advance payments under Section 451(c) would:

  • Allow taxpayers without an AFS to continue to defer advance payments in certain situations
  • Retain the types of revenues that are eligible for deferral, but with one new exception
  • Provide acceleration rules that require taxpayers to include advance payments in gross income in certain situations

Our Tax Insights story provides a detailed look these proposed regulations, including identifying where clarification is still needed.