Page 80 - TaxAdviser_2022

method under the final regulations, and
Taxpayers with contracts allocated to it would have the same taxable income
impact as under its present method of
multiple performance obligations under deferral. Alternatively, Taxpayer may
the new standards should examine the change to use the full-inclusion method
under the automatic procedures, and
treatment of revenue attributable to each if it does, it would recognize the entire
performance obligation to determine the advance payment in its 2021 tax-
potential existence of an advance payment able income.
Observations: Whether Taxpayer
eligible for deferral. decides to change to the full-inclusion
method or stay on the deferral method,
it is required to implement the final
regulations in 2021 and must change
3115, Application for Change in review those modifications for any from its present method of accounting.
Accounting Method, filed with the pending method changes and make However, if Taxpayer decides to imple-
IRS on or after Aug. 12, 2021. adjustments to comply as necessary. ment the deferral method under the
■ Streamlined method change final regulations, it may be eligible to
procedures are available to taxpayers Implementing the final do so under the streamlined procedures
implementing certain methods regulations in Rev. Proc. 2021-34 because the Sec.
provided for in the final regulations The following examples illustrate some 481(a) adjustment would be $0. Use of
that compute zero Sec. 481(a) of the decisions that taxpayers will need the streamlined procedures is optional,
adjustment. Such procedures do not to make during implementation of the and Taxpayer may instead choose to
require a taxpayer to complete and final regulations using the procedural make the change by filing a Form 3115.
attach a Form 3115 or statement to rules of Rev. Proc. 2021-34. For all Taxpayer should be aware that if it uses
the tax return. examples it is assumed that the taxpayer the streamlined procedures, it does
■ Audit protection is generally pro- is an accrual-method taxpayer with an not receive audit protection for prior
vided for all Forms 3115 filed under AFS and is on a calendar year end for years. While not directly the subject of
the revenue procedure. However, both tax and AFS. this example, Taxpayer is also incur-
taxpayers using the streamlined ring costs to which it could apply the
method change procedures will not Example 1: In December 2021, advance payment cost-offset method
receive audit protection. Taxpayer enters into a contract with (similar to Example 3), which would
■ The five-year scope limitation under its customer to manufacture and create an additional deferral of income.
Section 5.01(f) of Rev. Proc. 2015- deliver goods in 2023, with a total
13 (which limits a taxpayer’s ability contract price of $100, and receives Example 2: In July 2021, Tax-
to make automatic method changes an advance payment of $40. In its payer enters into a contract with its
if the taxpayer made a change for AFS, Taxpayer does not report any customer to provide professional
the same item in the prior five revenue in 2021 and will report the services with a total contract price
years) is waived for a taxpayer’s early entire $100 in its 2023 AFS, the of $100, billable upon delivery, with
adoption year or, if there was no year of delivery. Taxpayer is currently an estimated cost to deliver of $60.
early adoption, for the taxpayer’s first on a permissible one-year deferral The terms and conditions of the
tax year beginning on or after Jan. method under Rev. Proc. 2004-34. contract provide that if the customer
1, 2021. Thus, it appears that the cancels the contract, the customer
five-year waiver may only be used Analysis: Under its present method is only required to pay Taxpayer the
once by a taxpayer when applying of accounting, Taxpayer would recog- amount that it spent or incurred
the final regulations. nize no revenue for tax purposes in through the cancellation date. In
■ The revenue procedure adds seven 2021 because it did not recognize any its AFS, Taxpayer reports revenue
new automatic method changes to in its AFS. However, the entire $40 from the contract over time. Ad-
the current list of automatic changes advance payment will be recognized in ditionally, Taxpayer has determined
in Rev. Proc. 2019-43 and modifies taxable income in 2022. Taxpayer may that it generally only collects 90% of
several others. Taxpayers should change to use the one-year deferral the contract value from this type of

www.thetaxadviser.com February 2022 33