New safe harbor governs accounting for ratable service contracts

By Sally P. Schreiber, J.D.

Taxpayers using the accrual-basis method of accounting were given a safe-harbor to treat economic performance as occurring on a ratable basis for certain service contracts in guidance issued by the IRS on Thursday (Rev. Proc. 2015-39). This will allow taxpayers to ratably expense the cost of regular and routine services as the services are provided under the contract. The guidance also contains the procedures to automatically change an accounting method for taxpayers choosing to adopt this method.

For a taxpayer using the accrual method to take a deduction, all events must have occurred that establish the fact of the liability. This means that (1) the event fixing the liability has occurred, whether that is the required performance or another event, or (2) the payment is due, whichever happens earliest. The all-events test is not met before the tax year in which economic performance occurs. If the taxpayer’s liability is a result of another person’s providing services to the taxpayer, economic performance occurs as the person provides those services. Under current rules, however, it is not clear when a person has provided services satisfying the economic performance requirement in the context of a ratable service contract. Rev. Proc. 2015-39 addresses this issue.

Safe harbor

Under the safe harbor, a taxpayer may treat economic performance as occurring over the term of a service contract if the contract qualifies as a ratable service contract. To be a ratable service contract, the contract must meet the following requirements:

  1. The contract must provide for similar services to be provided regularly, meaning daily, weekly, or monthly;
  2. Each time a service occurs it must provide independent value, which means that the benefits of receiving each service occurrence do not depend on any previous or subsequent occurrence of the service; and
  3. The term of the contract cannot exceed 12 months (although contract renewal provisions are disregarded in determining the contract term).

The revenue procedure discusses contracts for janitorial and landscape maintenance services as typical examples of service contracts that may qualify for the safe harbor.

If a single contract includes services that satisfy the above requirements and services (or other items) that do not, those services (or other items) that do not satisfy the requirements of the safe harbor must be separately priced for the contract to qualify as a ratable service contract.

Accounting method change

A change to the safe-harbor method is a change in method of accounting. Taxpayers that want to adopt it must use the automatic change procedures in Rev. Procs. 2015-13 and 2015-14, as modified by Rev. Proc. 2015-39. For purposes of this change, the eligibility rule in Rev. Proc. 2015-13 (prohibiting method changes for the same item within five years) will not apply to a taxpayer that wants to make the change for its first, second, or third tax year ending on or after July 30, 2015.

Request for comments

The IRS is requesting comments by Nov. 15 on the proper treatment of contracts for (1) services that are not completed on a periodic basis, (2) multiple services that are not priced separately, and (3) ratable service contracts that are longer than one year.

Sally P. Schreiber ( is a JofA senior editor.


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