n IRS proposed revenue procedure will allow certain taxpayers using the accrual method of accounting to defer inclusion of specified advance payments in gross income. CPAs should examine notice 2002-79 in case the rules become final so as to be able to advise eligible clients.
In certain circumstances, revenue procedure 71-21 allows accrual-method taxpayers to defer inclusion of payments received (or amounts due and payable) in one tax year if attributable to services to be performed by the end of the next.
However, taxpayers and the IRS frequently disagree about whether advance payments are for services, nonservices or a mixture of both. Payments for nonservices and certain mixtures of services and nonservices do not qualify for deferral. In addition, it is unclear whether advance payments received under a series of agreements or a renewable agreement are within the procedure’s scope.
Under the proposed procedure, a taxpayer may report in taxable income either (1) the full amount of advance payments in the year received (the full-inclusion method) or (2) such payments in the year received, to the extent included for financial-reporting purposes, with the remainder reported in the next succeeding tax year (the deferral method). A taxpayer cannot defer income to a tax year later than the next succeeding tax year. Advance payments need not relate to services expected to be provided in the next succeeding year to be deferred.
If made final, the procedure would be effective for tax years ending on or after its date of publication.
For more information, see The Tax Clinic, edited by David Madden, in the June 2003 issue of The Tax Adviser.
—Lesli Laffie, editor