Now that companies are following new accounting methods to reflect revenue in financial statements, the Internal Revenue Service is offering new guidance on reflecting income in tax filings.
The IRS issued Revenue Procedure 2018-29 to give corporate taxpayers new procedures for changing their method of accounting for the recognition of income for federal income tax purposes. The procedure is meant to bridge the gulf that formed between tax rules and accounting rules when companies adopted a new method under GAAP to recognize revenue in financial statements.
Public companies began following a new revenue recognition standard, Accounting Standards Codification Topic 606, effective Jan. 1, 2018. Foreign private issuers adopted similar standards under International Financial Reporting Standards. Private companies are required to adopt the new GAAP standard by Jan. 1, 2019.
Under tax rules, companies are required to ask for permission to change their accounting method for recognizing income for tax purposes. Tax rules provide for some automatic method changes when the changes meet some specific criteria, but the changes companies have made or are making under ASC 606 and IFRS 15 often do not fit within the automatic method changes permitted by the IRS.
That suggests the IRS would be facing an avalanche of individual method change requests, unless it modified its rules to reflect the reality of the accounting changes companies are making or must soon make. The IRS earlier issued some proposed guidance for public comment and now has issued its new procedures under the new notice.
Under the new notice, companies can more easily make an automatic change in accounting method without having to request or secure IRS approval on an individual filer basis. The IRS took note of companies who said taxpayers in certain sectors, such as technology and construction, were particularly affected by disparities between book and tax rules.
The new notice says the IRS will permit automatic method changes when the accounting change pertains to identifying performance obligations, allocating transaction price to performance obligations, or considering performance obligations satisfied under the new accounting rules. It will not apply, however, to some specific circumstances outlined in the notice, including changes in how taxpayers identify contracts or determine transaction price, including changes in variable consideration in the transaction price.
The notice contains a number of other conditions taxpayers must meet to qualify for automatic method changes, and it poses a number of follow-up questions for a new round of comment and guidance. It also specifies that the new guidance does not address accounting implications associated with the Tax Cuts and Jobs Act, which produced big changes in corporate tax requirements that have big implications for financial reporting.