Section 451 all events test and advance payment final regulations

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January 2021

Overview

The IRS and Treasury have released final regulations under Sections 451(b), 451(c), and 1275 dealing with the all-events test for recognizing gross income and the limited advance payment deferral.  The final regulations include significant new rules on amounts for which there is no enforceable right to payment and on offsetting revenue for certain inventory costs.  

The final regulations apply generally for tax years beginning on or after January 1, 2021.  PwC professionals will discuss the regulations on a Tax Readiness webcast on Thursday, January 14, at 1 PM ET.

The takeaway

The Section 451(b) and (c) final regulations are disappointing in continuing to require taxpayers to recognize income in excess of the amount recognized in an AFS by failing to allow offsets to gross income for future liabilities such as refunds, rebates, and uncollectible amounts, which offset revenue in an AFS.  Although the inventory cost offset method should provide some relief to more closely align US tax income with AFS revenue, the method is highly complex and may be difficult to implement and apply.

In implementing the final regulations under Sections 451(b) and (c), taxpayers should consider the potential for legislation increasing the federal income tax rates that could apply for tax years beginning in 2022.  Taxpayers should model the impact of this possible rate increase and consider whether accelerating gross income into their 2020 or 2021 years, for example by using a full inclusion method for advance payments, might reduce their overall tax liabilities.

Contact us

Christine Turgeon

Partner, Federal Tax Services Leader, PwC US

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