Gift Cards - cutoff method without filing 3115 - no AFS

Technical topics regarding tax preparation.
#1
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Taxpayer is a restaurant that sells gift cards. Historically has treated un-redeemed gift cards as deferred revenue for book and tax purposes. Assume pre-TCJA method was correct. Taxpayer does not have an AFS.

Post TCJA - there is a cut-off method permitted under Rev Proc 2019-37 (I think). Would this:

1. Apply to a non-AFS taxpayer?

2. If so - would the taxpayer bifurcate between advance payments received pre-2017 and post-2017 (and so only look at post-2017 payments in light of the TCJA rules)?

3. Does the Rev Proc allow the taxpayer to continue to use a deferral method for the post-2017 sales, even without filing a 3115?
 

#2
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Section 451(c) added by the TCJA could not be applied to a taxpayer without an AFS, however, the IRS and Treasury concluded that section 451(c) does not prohibit a deferral method that is otherwise permissible under rev proc 2003-34 which allows taxpayers with non-afs to use the deferral method - see section 5.02(3)(b).

The deferral method is available to taxpayers without an AFS as defined in IRC section 451(b) and requires the taxpayer to include advance payments in income in the year of receipt. The amount included in income up to the amount that is earned in that year and the remaining amount is included in income in the following year.
 

#3
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asiraj - any responses regarding my questions above?
 

#4
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Henry, The proposed regulations under § 1.451-8 provide rules relating to the use of the deferral method for advance payments within the meaning of § 451(c) for taxpayers with or without an AFS.

I believe the taxpayer here can continue to use the deferral method for the post 2017 sales, then why would you be wanting to file a 3115. But to answer your questions, my understanding by reading rev proc 2019-37, the cut-off method is available to be used by TP with non-AFS and the change would take into consideration only the payments in the year of change.
 

#5
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the deferral rules aren't the same pre and post TCJA; hence the question
 

#6
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Two years to one year.. based on my understanding the cut-off would take payments in the year of change.

Maybe someone else can chime in and share.
 

#7
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Hope this helps..

https://www.grantthornton.com/-/media/c ... .451%2D8(d)%2C,events%20test%20under%20in%20Treas.&text=The%20procedures%20allow%20taxpayers%20a,Reg. See page 10 bottom and onwards.

https://www.federalregister.gov/documen ... ther-items

https://www.irs.gov/pub/newsroom/lbi-tc ... -13221.pdf - page 71 onwards

https://tax.kpmg.us/content/dam/tax/en/ ... -21-19.pdf - page 14
 

#8
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thanks, but not really...I don't think the first publication speaks to this situation with clarity, the IRS guidance doesn't discuss implementation...and the last article doesn't offer much regarding a taxpayer not filing a 3115
 

#9
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If i come across something regarding the 3115 in your situation, ill sure post here..
 

#10
Coddington  
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If I'm reading this correctly, the taxpayer is using a two-year deferral method under section 1.451-5 and now wants to change to the one-year deferral method for non-AFS taxpayers under proposed section 1.451-8(d).

Since they're making the change under section 16.2(b) for 2019 (second year beginning after 12/31/17), if they are also a non-shelter taxpayer that meets the 448(c) gross receipts test, they could use the streamlined procedures and would not have to file a Form 3115. Also, the cut-off basis procedures would not apply since this isn't a change under the relevant sections of 16.12(a) or proposed 1.451-8(c).

Even if they can use the streamlined procedures, it doesn't seem worth it because they wouldn't get audit protection.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#11
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Thanks Codington - if they make the change under the streamlined procedures, is there no 481(a) adjustment? Does the taxpayer simply treat the pre TCJA and post TCJA advance payments under the pre- and post- rules?
 

#12
Coddington  
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Section 16.12 of Rev Proc 2019-43 does not say that a cut-off method is available for changes under section 16.12(b). Generally, Rev Proc 2015-13 provides that a cut-off basis is only available when the Commissioner says it is. In the absence of language saying a cut-off is available, using the streamlined procedures with a 481(a) appears to be the appropriate course.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#13
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Wow, I’d never have guessed a 481(a) with no 3115.

To clarify further (for my own knowledge)-under the streamlined procedures, as I understand no statement is required, so the taxpayer simply gets to adopt the new rules and fix their cumulative income difference with the 481(a) adjustment with no special disclosure?

Would the taxpayer also get the 4-year spread of the income pickup?
 

#14
Coddington  
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The proposed regs are silent, the rev proc has specific rules for other situations, maybe new guidance will come out with clearer rules?
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 


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