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section 446 of the Internal Revenue Code of 1954, to
allow accrual method taxpayers in certain specified and
limited circumstances to defer the inclusion in gross
income for Federal income tax purposes of payments
received (or amounts due and payable) in one taxable
year for services to be performed by the end of the
next succeeding taxable year. Amounts due and payable
are, for purposes of this Revenue Procedure, treated as
payments received.
Section 2. Background
In general, tax accounting requires that payments
received for services to be performed in the future
must be included in gross income in the taxable year of
receipt. However, this treatment varies from financial
accounting conventions consistently used by many
accrual method taxpayers in the treatment of payments
received in one taxable year for services to be
performed by them in the next succeeding taxable year.
The purpose of this Revenue Procedure is to reconcile
the tax and financial accounting treatment of such
payments in a large proportion of these cases without
permitting extended deferral in the time of including
such payments in gross income for Federal income tax
purposes. Such reconciliation will facilitate
reporting and verification of such items from the
standpoint of both the taxpayers affected and the
Internal Revenue Service.
Section 3. Permissible Methods
.01 An accrual method taxpayer who receives a
payment for services to be performed by him in the
future and who includes such payment in gross income in
the year of receipt is using a proper method of
accounting.
.02 An accrual method taxpayer who, pursuant to
an agreement (written or otherwise), receives a payment
in one taxable year for services, where all of the
services under such agreement are required by the
agreement as it exists at the end of the taxable year
of receipt to be performed by him before the end of the
next succeeding taxable year, may include such payment
in gross income as earned through the performance of
the services, subject to the limitations provided in
sections 3.07, 3.08, and 3.11. However, if the
inclusion in gross income of payments received is
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