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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

What is Section 451?

What is Section 451?

The sixth day of January 2021 was the day the Treasury Department and Internal Revenue Service (IRS) decided to bring the IRC Section 451 regulation to a conclusion. However, the decision was posted on the IRS website on the twenty-first day of December 2020. The ending was to tackle the taxpayer's income timing via an accrual method and advance payment of goods, services, and other items. The final regulation took effect on the first day of January 2021. Taxpayers must follow the law as written and in a consistent manner. 


In addition, the conclusion addresses other taxpayers' matters, like IRC Section 61 under IRC Section 451. However, to comply with the regulation, you need deep knowledge of the decision, facts, and circumstances leading to tax differences.

  1. Section 451(b)

Generally, section 451(a) states that an item can be considered gross income and taxable under gross income for that tax year unless the accounting method used to consider taxable income, the amount, is regarded as taxable income. In essence, taxpayers are to include the item in annual income, considering all the right events regarding the payment and if the amount can accurately comply. Events that make the item consider taxable include:

  • The effort it takes to perform the task

  • The payment deadline

  • The payment received or whichever comes first.

Here is a breakdown of the conclusion in Section 451:

Section 451(1)(A) shows that a taxpayer that relies on the accrual method, all criteria to qualify an item as annual income, or afterward, completes the requirements can include the item as AFS revenue under Income Inclusion Rule (AFS). 

Section 451(b)(1)(B) contains special consideration of the AFS rule. The rule has nothing to do with taxpayers not in the AFS record for the tax season or anything concerning mortgage servicing contracts.

Furthermore, Section 451(b)(1)(C) states that all tests used to qualify an item of gross income under all possible events give the privilege to taxpayers to make the payment, and the IRS can determine the amount.

The next is Section 451(b)(2), which forces the AFS Income Inclusion Rule to exempt an item of gross income that is recognized using a special accounting method except in a provision of part V of subchapter P, which is clause (ii) of paragraph (1)(B).

Section 451(b)(3) considers AFS under section 451(b)(1)(A)(i) due to hierarchical financial views.

In addition, Section 451(b)(4) states that under section 451(b), a contract that has to do with a multitude of obligations, distribution of transaction money to perform such obligation is considered the cost set aside for such duty, such as taxpayer revenue producing items in AFS.

Section 451(b)(5) concludes that a taxpayer with entities in an AFS account will submit a financial statement which will be used as the Income Inclusion Rule for the taxpayer. 

From now on

Section 451 is the final regulation to provide privileges to taxpayers. Taxpayers are to understand and adopt the code to comply with taxes for the tax year. In addition, the guideline addresses accrual method users to understand and carefully see how the new laws affect their method of calculating or estimating tax returns for the 2021 tax year and how it affects the financial report under ASC 740. Section 451 also advised taxpayers to compare the cost and benefit of using the optional methods, such as the AFS revenue and the AFS cost offset methods. Thus, they will be able to assess how to make a deduction in tax liability and which is lighter in compliance burden. 

Finally, the IRS and Treasury will send taxpayers procedural guidance to help implement the final regulation. In addition, taxpayers are to remain updated on the new law and comply with the new rules. 



Jim McClaflin, EA, NTPI Fellow, CTRC
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