A two-year waiver of the new rule accelerating tax income recognition in response to financial statement treatment could ease administrative costs for taxpayers during the coronavirus pandemic, according to practitioners.
Carol Conjura of KPMG LLP told Tax Notes that a two-year window starting with the 2019 tax year in which taxpayers don’t have to apply the Tax Cuts and Jobs Act’s new section 451 provisions could substantially reduce some taxpayers’ administrative burdens.
Congress is considering another pandemic stimulus bill and has already resorted to TCJA tweaks in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), notably fixing the qualified improvement property (QIP) drafting error.
The QIP fix had been high on practitioners’ stimulus wish list ahead of the CARES Act, but at the same time, Conjura and other practitioners were already suggesting section 451 as another possible source of stimulus.
The TCJA added section 451(b) and (c) — the former requiring income recognition no later for tax than for book, and the latter codifying Rev. Proc. 2004-34, 2004-1 C.B. 991, as the only treatment for advance payments.
Conjura said section 451(b)’s “no later than” rule creates a large administrative burden for taxpayers because they have to keep track of two triggering mechanisms: the old due, paid, or earned standard and the new book inclusion standard. This duality is a stark contrast from a simple book-tax conformity rule, she said.
And section 451(c)’s one-way acceleration — income recognition is accelerated for tax as compared with book but deductions aren’t — creates another divergence from a simple book-tax conformity rule, Conjura said. These complications have caused much confusion about when taxpayers need to look to their financial accounting treatments for tax purposes, and temporary relief may be helpful, she said.
Leslie J. Schneider of Ivins, Phillips & Barker Chtd. said temporary relief from section 451 might be useful for private companies that haven’t yet been required to apply Accounting Standards Codification (ASC) Topic 606, “Revenue From Contracts With Customers,” another standard delayed during the pandemic.
Not So Fast
But larger public companies may see less benefit from a temporary relaxation of the section 451(b) rules, Schneider said. While the new rules come with enormous administrative costs, many companies bound by ASC 606 have already incurred those section 451(b) administrative costs, he said.
Ryan Corcoran of RSM US LLP agreed that while some taxpayers may benefit from temporary section 451 relief during the pandemic — perhaps by adjusting the effective dates of the provisions — they would be a minority of those affected. “It will be helpful for a number of companies, but so many companies have already started to do their best to comply with [section] 451 that I’m not sure that an effective-date change wouldn’t lead to more administrative burden than relief,” he said.
The administrative burden and complexity related to section 451 are different from other areas, such as net operating losses, in which taxpayers have seen temporary relief because of the coronavirus pandemic, Corcoran said.
Be Careful What You Advocate For
Corcoran said Congress could consider clarifying some of the confusion around cost offsets and realization under section 451 as part of a stimulus bill.
Taxpayers have been asking for clarification on how section 451(b) interacts with the realization requirement and for cost of goods sold deductions to follow income recognition acceleration. The government has proposed regulations under both section 451(b) and(c) and is finalizing them.
Corcoran suggested that Congress try to clarify the new provisions in the wake of changes — including the advent of ASC 606 — and lessons learned since the outlines of the enacted provisions were proposed by former House Ways and Means Committee Chair Dave Camp.
Schneider said some practitioners are wary of asking Congress to address the cost offset issue. While a legislative clarification would be welcome, if Congress doesn’t come through, Treasury may become even more resistant to allowing acceleration of cost of goods sold deductions in the final regulations, he said. The regulatory solution would probably be better, he said.
Conjura said she is reluctant to ask for a legislative provision on cost offsets because at least for section 451(b), she reads the statute as already allowing them. Otherwise, a provision governing gross income would instead become a gross receipts tax, she said.