Charlie Munger, Warren Buffet's legendary comanager, wisely noted that ''Creative accounting is an absolute curse to a civilization.'' Mr. Munger was lamenting the use of accounting fictions to create false revenues.
When taxpayers determine their revenue for federal income tax purposes, however, not only does false revenue seem to vanish, but Congress was concerned that actual receipts might vanish as well. In order to curtail such creative accounting, as part of the 2017 Tax Cuts and Jobs Act, Congress inserted Section 451(b) into the tax code to require taxpayers, beginning in 2018, to report income no later than when such revenue is shown on an applicable financial statement (an AFS). On the other hand, the TCJA, building on Revenue Procedure 2004-34, added tax code Section 451(c). This provision permits taxpayers to elect to defer certain advance payments received for goods and services for one year, provided that such payments are not taken into account in the year of payment for financial accounting purposes. On Sept. 5, 2019, the Internal Revenue Service proposed regulations (together, the ''proposed regulations'') and Rev. Proc. 2019-37 to implement and coordinate these two sets of rules. (REG-104554-18 (Sep. 5, 2019) and REG-104870-18 (Sep. 5, 2019).)
Download >> INSIGHT: Creative Accounting—IRS Proposes Regulations Addressing Advance Payments, Book-Tax Conformity
Originally published in Bloomberg Daily Tax Report
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