TCJA section 451 changes do not alter cash-method income rules

Plain-English summary

Chief Counsel advised that the Tax Cuts and Jobs Act changes to section 451 do not alter the constructive-receipt and prepaid-income rules for cash-method taxpayers. New sections 451(b) and 451(c) govern accrual-method taxpayers by linking some income recognition to financial statements and establishing rules for advance payments. The legislation did affect which businesses may use the cash method by increasing the section 448 gross-receipts threshold. Corporations and partnerships generally qualified under the stated rule if their average annual gross receipts for the preceding three years did not exceed $25 million.

Ruling snapshot

• Question: Did the Tax Cuts and Jobs Act change the constructive-receipt or prepaid-income rules for cash-method taxpayers?
• Outcome: advice given, those rules were not changed for cash-method taxpayers
• Key authorities: IRC §§ 448(c)(1), 451(b), and 451(c); Tax Cuts and Jobs Act § 13102

Full text (IRS public release)

ID:          CCA_2019102215185464
UILC:        451.00-00

Number: 202002013
Release Date: 1/10/2020
From:
Sent: Tuesday, October 22, 2019 9:56 AM
To:
Cc:                 Subject: FW: TCO Training Review Project - Question Regarding the TCJA

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You asked us whether any changes in the Tax Cuts and Jobs Act of 2017 (TCJA) would impact
the basic rules of constructive receipt and prepaid income with regard to cash-basis method
taxpayers. Your understanding of the changes is correct; TCJA would not impact these rules for
cash-basis method taxpayers.

TCJA has made changes to I.R.C. § 451 which affect only accrual method taxpayers. Under §
451(b), an accrual method taxpayer must recognize revenue under the all events test no later than
the taxpayer recognizes revenue on an applicable financial statement. Under § 451(c), an accrual
method taxpayer must include advance payments as gross income in the taxable year that the
taxpayer receives the advance payment, unless the taxpayer makes a § 451(c)(1)(B) election.

As you noted, § 13102 of TCJA does affect the status of some taxpayers as cash basis taxpayers
by increasing the limitation of the § 448(c)(1) gross receipts test. In order to qualify for the cash
receipts method under § 448, corporations and partnerships must have average annual gross
receipts that do not exceed $25,000,000 over the three taxable year period preceding the taxable
year.

If you have any other questions, please contact me.

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