Academic journal article Journal of Accountancy

Tax Implications of the New Revenue Recognition Standard

Academic journal article Journal of Accountancy

Tax Implications of the New Revenue Recognition Standard

Article excerpt

A company cannot simply change its tax method to follow the new book method.

By now, most companies are aware that FASB has issued an Accounting Standards Update (ASU) for revenue recognition related to contracts with customers (ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606)). Some companies may have already started planning the implementation for financial statement purposes. However, the effect of this change in financial accounting hits more than just the financial statements--significant changes could also be in store for tax purposes.

Even though implementation of the standard has been delayed, companies should get a jump on analyzing its effects and evaluating tax methods. Companies waiting until the last minute to understand the tax implications of the change may be at a disadvantage due to a change in information flow or timing for making crucial accounting method changes.

TAX ACCOUNTING METHOD CONSIDERATIONS

It is important to understand that if a company's tax method has been following financial accounting and the company changes its book method, it cannot simply change its tax method to follow the new book method. Rather, it needs to evaluate whether applying the tax rules would result in the same answer as the new book method, and, if so, the company will have to file a Form 3115, Application for Change in Accounting Method, to request consent from the IRS to change its tax method of accounting for an item.

For certain changes enumerated in Rev. Proc. 2015-14, IRS consent is automatic if the taxpayer meets certain eligibility requirements. All other changes require advance consent. An automatic method change request is due by the extended due date of the federal income tax return, and an advance consent method change request is due by the last day of the tax year of the change. Upon the taxpayer's filing of Form 3115, the IRS will permit the taxpayer to use the new method of accounting for automatic changes. For advance consent changes, the IRS will permit the taxpayer to use the method only after consent has been granted and the terms and conditions have been accepted by the taxpayer. …

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