IRS proposes removing favorable advance payment regulation

Tax Hot Topics newsletterThe IRS has published a notice of proposed rulemaking (REG-104872-18) that would remove the existing Treas. Reg. Sec. 1.451-5 regarding advance payments for goods.

The current regulation generally allowed the deferral of advance payments for federal income tax purposes as long as, under the method of accounting used, a taxpayer would include the revenue in gross income no later than when it was recognized for financial statement purposes. That deferral could be more generous than the one-year deferral provided in Rev. Proc. 2004-34, and often resulted in deferral periods of two years or more.

The Tax Cuts and Jobs Act (TCJA) amended Section 451 by adding new subsections (b) and (c). Section 451(b) generally requires a taxpayer with applicable financial statements to include an item in revenue no later than when it is included for financial statement purposes. Section 451(c) codifies a deferral of not more than one year for advance payments received for goods or services, similar to the rules of Rev. Proc. 2004-34. The IRS stated in the notice preamble that the TCJA provisions override the regulation and, accordingly, have proposed to remove it.

As a result, taxpayers that who been following the deferral rules in Treas. Reg. Sec. 1.451-5 will need to change to another method. Taxpayers will need to follow existing rules for changes in accounting method. Until such time as regulations under Section 451(c) are issued, taxpayers may generally decide to use either a full inclusion method or a one year deferral method for advance payments under Rev. Proc. 2004-34. For more details, see our earlier Tax Hot Topics on past guidance issued under Section 451(c).

Sharon Kay
Partner, Accounting Methods
Washington National Tax Office
T  +1 202 861 4140

Caleb Cordonnier
Washington National Tax Office
T +1 202 521 1555

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