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Electing to defer advance payments under Rev. Proc. 2004-34.

Article Excerpt
Sec. 451 generally requires taxpayers to recognize all gross income in the year received. Rev. Proc. 71-21 (which intended to reconcile financial and tax treatments for certain services) allowed a one-year deferral for accrual-basis taxpayers that received advance payments for services in specific, limited situations. However, considerable controversy arose as to the definition of advance payments for services and the treatment of payments received under renewable agreements.

In Rev. Proc. 2004-34, the IRS expanded Rev. Proc. 71-21's scope. It permits accrual-basis taxpayers to defer recognizing advance payments for tax purposes, including those that blend services and nonservices and those with terms that extend beyond the succeeding tax year. (Cash-method taxpayers considering a change to the accrual method may also benefit.) Rev. Proc. 2004-34 describes the procedure for making the election.

This item outlines the basic factors revolved in calculating a deferral and, thus, determining whether an election is in a taxpayer's best interest. (This item does not summarize all of Rev. Proc. 2004-34's requirements.) To make this determination, the taxpayer would calculate the immediate and projected future tax effects of the deferral election.

The Rules

Under Rev. Proc. 2000-34, Section 4.01 (3), taxpayers who receive payments for any...

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