New GAAP revenue recognition standard could cause hefty tax bills for private companies
Private companies adopting ASC 606, the new GAAP revenue recognition standard, could face significant impacts. As such, taxpayers should act now to identify changes to tax revenue recognition, as many taxpayers may see an acceleration of revenue on their 2019 tax returns. Specifically, ASC 606 may cause some accrual-basis taxpayers — manufacturers, in particular — to recognize income for tax purposes much earlier than the related expenses, which will result in an increase to taxable income, but a mismatch of book and tax expenses. Other taxpayers may need to maintain old systems and former GAAP methods of accounting to continue on historic tax methods, where permissible. Fortunately, there may be planning opportunities available for taxpayers that act prior to year-end. Certain taxpayers may be able to file a tax accounting method change to adopt a favorable tax method for certain contracts, but calendar-year taxpayers may need to file method changes with the IRS by Dec. 31, 2019.Who is most significantly affected by ASC 606?
The most significant revenue accelerations are likely to occur in accrual-basis taxpayers that are moving to “over-time” recognition under the new GAAP standard. In most cases, GAAP will match revenue and expenses using “over-time” recognition. However, for tax purposes, companies may need to accelerate the revenue to match book income but may not be able to accelerate the related expenses. There may be relief for manufacturers, especially custom manufacturers, who are eligible or required to use the percentage-of-completion method for tax purposes. Such taxpayers need to act quickly to adopt the percentage-of-completion method by the end of 2019.
Specifically, ASC 606 may cause some accrual-basis taxpayers — manufacturers, in particular — to recognize income for tax purposes much earlier than the related expenses.
Other taxpayers may see changes to deferred revenue and contract expense recognition, causing larger disparities between book and tax income.
Tax reform makes this GAAP change different than previous changes
If you’ve been through previous GAAP changes without seeing a significant tax return impact, be aware that 2017’s TCJA and related regulations made some modifications to align tax revenue with GAAP revenue. In the past, tax rules weren’t necessarily dependent on GAAP methods. After TCJA, more taxpayers will be impacted by ASC 606 and will likely need to file an accounting method change with the IRS.
Early integration of tax and accounting planning
If your business is an accrual-basis taxpayer adopting ASC 606 in 2019, your most important to-do is to contact your Plante Moran tax advisor for a tax revenue recognition analysis. Depending on the results of that analysis, the filing of a tax accounting method change before year-end could have a significant impact on your 2019 income tax return. In addition, taxpayers should consider the impacts when making fourth-quarter estimated tax payments and extension payments.
Pass-through entities and small-to-midsized taxpayers who are eligible for the cash method may also want to reevaluate whether the cash method for tax purposes is a good option for them, in light of the new changes to taxable income recognition. Adopting the cash method may require a tax accounting method change by the end of the year.
Over the longer term, consider process changes that might integrate the income tax function into discussions about accounting modifications at an earlier stage. Whenever your business changes an accounting method for financial statement purposes, either by election or as required by new GAAP rules, make sure that you work from the outset to understand what corresponding changes may be needed in tax accounting methods.
