The Tax Cuts and Jobs Act of 2017 (TCJA) amended Section 451 of the Internal Revenue Code (IRC) to provide that an accrual-basis taxpayer recognizes revenue at the time the all-events test has been met, but no later than when that item is taken into account as revenue in an applicable financial statement (AFS / the AFS Income Inclusion Rule). This new Section 451(b) also overturned the historical federal income tax treatment of credit card late fees, credit card cash advance fees, and interchange fees by subjecting the fees to the AFS Income Inclusion Rule instead of the original issue discount (OID) timing rules. In addition, Section 451(c) was added which codified the deferral method of accounting for advance payments.
In addition, prior to the enactment of the TCJA, Treasury and the IRS accepted the treatment of certain credit card fees associated with pools of credit card receivables as creating or increasing OID on those pools. A taxpayer could have treated as OID amounts attributable to certain credit card fees associated with pools of credit card receivables, including credit card late fees, credit card cash advance fees, and interchange fees. In certain circumstances, for purposes of Rev. Proc. 2013-26, a taxpayer could have treated certain amounts as OID that would not otherwise be treated as such (for example, market discount or bond premium).
Final regulations were issued by Treasury and the IRS on December 30, 2020, applicable to taxable years beginning on or after January 1, 2021, to reflect the new guidance for revenue recognition and OID pursuant to the TCJA changes, with the exception of a few rules pertaining to specified fees, that are not credit card fees, where the new rules are not applicable until taxable years beginning on or after January 6, 2022.
Rev. Proc. 2021-34
Rev. Proc. 2021-34 was released to provide guidance on how to change accounting methods to comply with the new Treasury regulations regarding revenue recognition, advance payments, and OID, along with changes for certain inventory costs if such changes are made in connection with a change to comply with the revenue recognition or advance payments regulations. Procedural changes are also included in Rev. Proc. 2021-34 relating to the filing of accounting method changes for the cost-offset inventory changes.
Modifications to the automatic accounting method changes addressed in Rev Proc 2021-34 include:
- Modifying the UNICAP and inventory valuation changes to temporarily waive the eligibility rule stating that the same change cannot be filed under the automatic consent procedures within five taxable years for certain inventory changes made in connection with compliance with the revenue recognition and advance payment regulations;
- Modifying the change in overall method of accounting from the cash method to an accrual method for taxpayers with an AFS;
- Removing the automatic change for credit card late fees;
- Modifying the automatic change for advance payments that cite the obsolete Rev. Proc. 2004-34 by making the change inapplicable for a year of change beginning on or after January 1, 2021;
- Removing the automatic change for credit card cash advance fees;
- Modifying the change to comply with ASC 606 (referred to as the “New Standards”) to make it inapplicable for changes to comply with Section 451(b) and Section 451(c) and the regulations thereunder, and modifying the change in AFS to comply with the new revenue recognition and advance payments regulations to provide terms and conditions for taxpayers that adopt the New Standards but are no longer eligible to file under the old change to the New Standards;
- Modifying the change relating to changes in the timing of income recognition under Section 451(b) and Section 451(c) to remove the prior automatic change to comply with Section 451(b);
- Correcting the New Standards and timing of income recognition under Section 451(b) and Section 451(c) changes for members of consolidated groups filing these New Standards, revenue recognition, and advance payments changes to be governed by these changes rather than the changes regarding the timing rules for intercompany transactions;
- Clarifying that when certain accounting method changes related to the cost offset methods that are required to be filed under the non-automatic change procedures are filed, taxpayers are required to provide a net Section 481(a) adjustment when filing both the changes for the timing of income recognition and a change for inventory sales during the same taxable year;
- Adding a new, permissible, automatic change for inventory costs to comply with timing rules for expenses incurred in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred. When providing property or services, economic performance occurs when the taxpayer incurs the costs, if the taxpayer: (1) presently takes inventory costs into account in a taxable year prior to the taxable year in which such costs are incurred; (2) recovers such costs in a taxable year prior to the taxable year in which ownership of inventory is transferred to the customer to offset income inclusions; and (3) meets certain other requirements; and
- As described below, modifying the automatic change for OID on a pool of credit card receivables when using the proportional method.
Many taxpayers have yet to review revenue streams to determine if the modifications to Section 451 and the new Treasury regulations are applicable. As such, taxpayers may be on impermissible methods which will need to be corrected through the filing of an accounting method change.
Rev. Proc. 2021-35
Rev. Proc. 2013-26 allows a taxpayer to use a safe harbor method (the “proportional method”) for OID on a pool of credit card receivables for tax purposes. Rev. Proc. 2021-35 modifies Rev. Proc. 2013-26 to reflect changes made to the treatment of certain credit card fees by the TCJA.
Treas. Reg. § 1.1275-2(l) was promulgated to clarify that OID no longer includes the recognition of income that is subject to the timing rules of Treas. Reg. § 1.451-3, because the item is a specified fee, such as a specified credit card fee. Accordingly, Rev. Proc. 2013-26 has been modified by Rev. Proc. 2021-35 such that any taxpayer that wants to use the proportional method for calculating OID accruals on a pool of credit card receivables may treat as OID only fees or charges that are not subject to the timing rules of Treas. Reg. § 1.451-3 (such as promotional discount) and certain amounts that would not otherwise be treated as OID (such as market discount or bond premium).
Taxpayers should evaluate the applicability of these updated rules to determine whether they are required to file an accounting method change. An automatic accounting method change may be filed to change the method of accounting for OID on a pool of credit card receivables to the proportional method.
Please contact your Mazars professional for additional information.
Published on August 31, 2021