ASC 606, Revenue from Contracts with Customers, represents a monumental change to how companies recognize revenue. The tax implications of a company’s adoption of ASC 606 for financial reporting purposes are varied and complex—in some cases, creating new book tax differences and additional data maintenance requirements. Compounding the tax impacts are changes to the tax rules under Internal Revenue Code (IRC) Section 451 for revenue recognition.
These financial and tax reporting rule changes are effective at different times depending on the reporting characteristics of the company. ASC 606 is effective for public organizations for annual reporting periods beginning after December 15, 2017; for nonpublic companies, the effective date is for annual reporting periods beginning after December 15, 2018. The tax rule changes are effective for tax years beginning after December 31, 2017, but they may not apply to smaller taxpayers that don’t have audited financial statements.
It’s possible many companies will need to address both rule changes in the same reporting period. Others may need to address them in different years and still others may only need to address the ASC 606 changes.
As companies identify changes to financial reporting due to ASC 606, they’ll need to address the corresponding impacts for tax purposes for each change. Some companies may choose to conform tax to book, assuming the book method is permissible for tax purposes. This will generally require the filing of an accounting method change request for tax purposes. Alternatively, some changes may result in a book tax difference, which may require a tax accounting method change request and will require an assessment of available data to compute the necessary adjustment on an annual basis.
The changing rules for financial reporting require companies to assess their revenue recognition processes to determine how they’ll conform to the new standards. A similar assessment is required for tax as each change to financial reporting must be analyzed from a tax perspective.
Many aspects of how revenue is recognized under ASC 606—including the treatment of expected costs to generate such revenue—aren’t permitted methods for tax purposes. For instance, recognized revenue that includes some element of variable consideration may require tax recognition at a later date when the variability is resolved. Making sure the data is available to record these adjustments each year will be critical.
It’s important for the tax considerations to be addressed on a gross basis. Under ASC 606, many changes may be reported net of expenses. The revenue and cost components must be evaluated separately for tax. An immaterial net impact for financial reporting does not mean there will be an immaterial impact for tax.
For situations where a tax method change is required, the procedural requirements are complex. There are several revenue procedures that may apply depending on the specific change at hand and it’s not always clear which one applies. In many cases, companies may be required to file more than one tax method change request. The earlier the tax analysis is performed, the better position you will be in to address these issues.