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payment amount). (The excess of the advance payment over the
qualified advance payment amount is included in the seller’s
income in the taxable year of receipt.) The revenue procedure
provides that the qualified advance payment amount, as augmented
by certain imputed income equal to the interest cost of the
income deferral, can be deferred and included ratably in income
over the shorter of (1) the period beginning in the taxable year
the advance payment is received and ending when the service
warranty contract terminates, or (2) a 6-taxable-year period
beginning in the taxable year the advance payment is received.6
For purposes of computing the deferral period and the “interest-
equivalent” imputed income, all advance payments for service
warranty contracts sold during the taxable year are effectively
treated as if they were entered into, and payment received, on
the first day of the taxable year.
Rev. Proc. 92-98, supra, further provides that an election
to use the service warranty income method is not available to a
taxpayer unless the taxpayer uses the proper method of accounting
for amounts paid or incurred for insurance costs that cover the
taxpayer’s risks under the service warranty contracts, as
outlined in a revenue procedure issued simultaneously with Rev.
Proc. 92-98, supra; namely, Rev. Proc. 92-97, 1992-2 C.B. 510.
6 The series of level payments thus generated is designed to
equal the present value of the qualified advance payment amount.
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Last modified: May 25, 2011