IRS releases guidance to taxpayers for changing accounting methods to conform to financial accounting revenue recognition standards

On May 10, 2018, the IRS released Revenue Procedure 2018-29 (hereinafter Rev. Proc. 2018-29) to provide new, automatic procedures for taxpayers changing their method of accounting for the recognition of income for federal income tax purposes to a method for recognizing revenues described in the new Financial Accounting Standard Board (FASB) standard for revenue recognition. Under the new FASB standard (titled Revenue from Contracts with Customers), an entity must recognize revenue for financial statement purposes for goods and services promised to customers in an amount that reflects what the entity expects to receive in exchange for those goods and services.  

Rev. Proc. 2018-29 creates new, automatic accounting method change procedures by adding new Section 16.11 to the list of automatic procedures. It provides procedures for obtaining automatic consent of the IRS Commissioner for a taxpayer that wants to change its method of accounting for recognition of income for federal income tax purposes to a method that uses the new financial accounting standards for the following:

1. Identifying performance obligations; 
2. Allocating transaction price to performance obligations; and/or
3. Considering preformation obligations satisfied. 

A taxpayer may request a change under these automatic provisions only if the taxpayer’s new method of accounting is otherwise permissible for federal income tax purposes and the change in method of accounting is made for the taxable year in which the taxpayer adopts the new standard for financial accounting purposes. Rev. Proc. 2018-29 further provides that a change under Section 16.11 may only be made in the taxpayer’s first, second or third taxable year ending on or after May 10, 2018. A taxpayer making a change under Section 16.11 may implement the change with either an IRC Section 481(a) adjustment or on a cut-off basis. A taxpayer making a change under Section 16.11 is eligible for reduced filing requirements, thereby limiting the portions of the Form 3115, Application for Change in Accounting Method, required to be completed.

Rev. Proc. 2018-29 is not intended to provide guidance for taxpayers changing their method of accounting to comply with amended IRC Section 451 of the new tax law, but rather only provides guidance for taxpayers changing a method of accounting to an otherwise permissible method of accounting that recognizes revenue in income in a manner described in the new FASB standard. The Treasury Department and IRS are expected to provide future guidance to address the changes made to IRC Section 451 as a result of the new tax law.