Timing of income recognition under the TCJA: Proposed regulations provide much-needed guidance

As part of the Tax Cuts and Jobs Act (TCJA), Congress enacted two new sections that address when revenue is recognized -- §§ 451(b) and 451(c). These sections do not determine whether income is realized; instead, they determine the timing of income recognition under the taxpayer's method of accounting. Revised §451(b) changes the rules for the timing of income recognition under the all events test, and new §451(c) generally codifies Revenue Procedure 2004-34 to allow certain taxpayers to defer income recognition for advance payments. Proposed reliance regulations implementing these two sections were issued in September 2019 and provide much-needed guidance to accrual method taxpayers. Part I of this article presents Proposed Regulation §1.451-3, which addresses the timing of gross income recognition under §451(b), and Part II describes the rules for reporting advance payments as income under §451(c) in Proposed Regulation §1.451-8. The article concludes by applauding the increased clarity the proposed regulations provide, while recognizing that a significant issue regarding cost offsets remains that should be addressed in final regulations.