Schedule B—Changes Related to the Deferral Method for Advance Payments, Cost Offset…

Line 1. The deferral method for advance payments. In general, advance payments must be included in gross income in the tax year of receipt for federal income tax purposes. However, under Regulations section 1.451-8(c) or (d), an applicant may defer the inclusion in income of certain advance payments (or a portion thereof), as defined in Regulations section 1.451-8(a)(1), to the next tax year. If the applicant is also using the advance payment cost offset method, the portion of any advance payment to which the cost offset applies is deferred to the tax year in which ownership of the good is transferred to the customer. Under the cost offset method, only the portion of the payment in excess of costs incurred is recognized by the year following the year of receipt.

Applicants with or without an applicable financial statement (AFS), as defined in Regulations section 1.451-3(a)(5), may be eligible to use a deferral method for advance payments. See section 451(c), Regulations section 1.451-8, and section 16.10 of Rev. Proc. 2022-14 for more information about the deferral method for advance payments.

Some applicants requesting to change to the deferral method must file under the non-automatic change procedures of Rev. Proc. 2015-13. See section 16.10(3) of Rev. Proc. 2022-14. All other applicants must generally file under the automatic change procedures of Rev. Proc. 2015-13.

If the applicant is requesting to change to the deferral method for advance payments described in Regulations section 1.451-8(c) or (d), attach a detailed description of the present and proposed methods including the following information.

1. Explain how the payments meet the definition of an advance payment as defined in Regulations section 1.451-8(a) (1).

2. Does the applicant have an AFS as defined in Regulations section 1.451-3(a)(5)? If so, identify the type of AFS.

3. For applicants with an AFS. Describe the advance payment allocation method if there is more than one performance obligation as defined in Regulations section 1.451-3(a)(11). For applicants without an AFS. If the applicant receives an advance payment that is attributable to one or more items described in Regulations section 1.451-8(a)(1)(i)(C), describe the objective criteria on which the applicant's method is based. For example, the allocation method may be based on payments the applicant receives for an item or items it regularly sells or provides separately.

4. For applicants with an AFS. Under the proposed method, if the applicant is required to adjust AFS revenue in accordance with Regulations section 1.451-8(c)(2), describe the specific adjustments used to arrive at the amount taken into account as AFS revenue.

Applicants filing under the non-automatic change procedures of Rev. Proc. 2015-13 should include all information requested in the instructions for Schedule B, line 1, and see Rev. Proc. 2015-13 and Non-automatic change scope and eligibility rules under Part III, earlier, for additional requirements.

Line 2. Cost offset methods. Regulations section 1.451-3(c) allows taxpayers to use a cost offset accounting method to

-12-

determine the AFS income inclusion amount from the sale of inventory (AFS cost offset method). See Regulations section 1.451-3(c) for the rules relating to the AFS cost offset method. Applicants using this method for a trade or business that have advance payments for the sale of inventory must also use the advance payment cost offset method described in Regulations section 1.451-8(e). If an applicant chooses to use the AFS cost offset method and/or the advance payment cost offset method, as applicable, it must use such method(s) for all items of gross income in the trade or business that meet the criteria set forth in Regulations sections 1.451-3(c) and 1.451-8(e), as applicable. Under the AFS cost offset method and the advance payment cost offset method, the cost of goods in progress offset must be determined separately for each item of inventory. Under some circumstances, an applicant without an AFS may use the advance payment cost offset method in Regulations section 1.451-8(e). See DCN 253 in section 16.10 of Rev. Proc. 2022-14. Applicants changing to or within a cost offset method may be required to make concurrent accounting method changes, including cost-offset related inventory changes, as defined in section 5.06 of Rev. Proc. 2015-13, as modified by section 4.02 of Rev. Proc. 2021-34. See DCN 255 in section 16.10 of Rev. Proc. 2022-14. If the applicant is requesting to change to or within a cost offset method, attach a detailed description of the present and proposed methods including the following information.

1. Does the applicant have an AFS as defined in Regulations section 1.451-3(a)(5)? If so, identify the type of AFS.

2. Describe any other concurrent proposed cost-offset related inventory method changes and describe the order in which the concurrent changes are being implemented. See section 16.10 of Rev. Proc. 2022-14.

3. Provide a general description of the items of inventory to which the change applies.

4. Describe how the applicant determines the cost of goods allocable to each respective item of inventory as required by Regulations section 1.451-3(c)(3) or Regulations section 1.451-8(e)(4), as applicable.

Line 3. Methods to conform to the AFS income inclusion rule. Generally, for an accrual method taxpayer, the all events test under Regulations section 1.451-1(a) for an item of gross income, or portion thereof, is met no later than when that item, or portion thereof, is taken into account as AFS revenue (AFS income inclusion rule). The AFS income inclusion rule does not apply to taxpayers that do not have an AFS, as defined in Regulations section 1.451-3(a)(5), for a tax year. See section 451(b), Regulations section 1.451-3, and DCN 250 in section 16.10 of Rev. Proc. 2022-14 for additional information about methods to conform to the AFS income inclusion rule.

If the applicant is requesting to change to or within a method to conform to the AFS income inclusion rule under section 451(b) and Regulations section 1.451-3, attach a detailed description of the present and proposed methods including the following information:

1. Identify the type of AFS that is used for purposes of the AFS income inclusion rule.

2. If the taxpayer is required to allocate transaction price to multiple items of gross income in accordance with Regulations section 1.451-3(d), including any item(s) of gross income that is accounted for under a special method of accounting, describe the present and proposed allocation method.

3. Under the proposed method, if the applicant is required to adjust AFS revenue in accordance with Regulations section 1.451-3(b)(2), describe the specific adjustments used to arrive at the amount taken into account as AFS revenue.

4. If under the applicant's proposed method of accounting, AFS revenue is reduced in accordance with the enforceable right rules in Regulations section 1.451-3(b)(2)(i)(B), describe why the applicant does not have an enforceable right to the reduction amount.