Posted by Elliot Kravitz, ATP

Advance Payment for Goods and Services

Advance Payment for Goods and Services

There are some rules from section 451 (c) as amended by the TCJA, which makes available ways to have advance payment in income for the tax year that it was obtained.

The amendment of section 451 (c) makes available the accrual method for taxpayers to delay the inclusion of the revenue from some goods and services. They can delay it to a subsequent tax year provided the income is deferred for AFS (Applicable Financial Statement) purposes.

Some Regulations Taxpayers Need to Know

Advance payment is a payment from the taxpayer that fulfills the following conditions:

  1. One of the accounting methods allowed involved using the entire payment amount as income in the receipt year.

  2. The taxpayer used some part of the payment as revenue for coming years in an AFS

  3. The payment is for some revenue types.

There are specific payment types that qualify for deferral. Examples are payments for goods and services, gift cards, software, subscriptions, some warranty contracts, loyalty program rewards, etc.

 According to the regulation, there are examples that reveal that advance payments for reward points, discount vouchers, and other similar payment types, classified as distinct performance obligations, might qualify for deferral treatment.

Taxpayers in the retail and transport business will find this news exciting. These examples reveal what you get from the various treatments of these items for financial statement purposes with the new accounting law. With this new standard, several taxpayers classify these items as future revenue and not a part of the accrued expense.

Based on the proposed regulation, some items are not part of the advance payment definition. Examples are rent, payments for financial instruments, fees for some warranty or guaranty contracts, etc.

With the proposed regulation, there is an exclusion of payments gotten more than one tax year before the year of the contractual delivery date for goods specified. For a good to be specified, it must meet the following criteria:

  1. The taxpayer did not have the exact good or similar good at the end of the year when the advance payment came in.

  2. The taxpayer recognized all the revenue from the same as the good.

At first, this arrangement was thought to bind the defense and aerospace sector. Varieties of taxpayers, however, could be bound by the agreement.

A critical thing everyone should note is that advance payment provision seems to be operable at the gross receipt level. In introducing these proposed regulations, it was revealed that no corresponding offset exists for goods sold. This means that while taxpayers might have income in a year, there might not be a corresponding offset for the associated goods sold in later tax years.


How Taxpayers Without an AFS Can Go About Deferrals 

At first, the deferral method for taxpayers without an AFS was limited by the TCJA. There are, however, proposed regulations that give taxpayers without an AFS the opportunity to employ deferral methods depending on when they earn income. They do this by applying the achieved standard.

With the non-AFS deferral method, taxpayers that do not have an accrual-method who get advance payments should include it in their income for the tax year of their receipt. Whatever is left of the advance payment is applied in the coming tax year. 

Judging by the regulations proposed, payments only come when they meet the all-events test, not considering the date of receipt. Taxpayers that cannot determine the extent of an earned revenue in the year they got the receipt, can do so provided the following is true:

  1. The availability of adequate data makes it possible to use a statistical basis.

  2. A basis that clearly shows the income



Elliot Kravitz, ATP
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