The Tax Cuts and Jobs Act of 2017 (TCJA) included an amendment to Section 451(b) that requires accrual method businesses to recognize income no later than it is recognized in their financial statements. For many taxpayers, this accelerates taxable income that historically would not have been reported for tax purposes until the “all events test” was satisfied. Furthermore, the proposed regulations generally did not permit a reduction in this accelerated portion of the income for any costs.
Released late December, the final revenue recognition regulations (TD 9941) reflect legislative changes made by the TCJA and finalize regulations that were proposed in September 2019.
The final regulations are more favorable to taxpayers, providing that taxpayers with inventory can generally reduce the financial statement income by the cost of the goods sold consistent with Regulation 1.451-3. Additionally, the final regs provide that a taxpayer does not have to report any income that the taxpayer does not have a legal right to recover. Taxpayers with certain goods, as specified in the regulations, can utilize Section 451(c) when reporting the income. And special rules apply where the financial statement income includes advance payments for contracts that are subject to additional obligations.
While the final regulations are effective for tax years beginning after Dec. 31, 2020, they do permit taxpayers to choose to apply them retroactively for any tax year beginning after Dec. 31, 2017, if applied consistently in the intervening years.
Final regulations Section 1.451-2 also permit taxpayers to elect to defer inclusion of income related to advance payments for goods and services to the year following the taxable year when it is received if the income is deferred in the financials.