Accrual method taxpayers are permitted to deduct the costs of services as they are provided. However, current rules do not offer guidance as to how to determine when the services are provided when the taxpayer has entered into a service contract that spans multiple taxable years. The IRS has now provided a safe harbor method for ratable service contracts. 1
Under the safe harbor method, the services are treated as provided ratably over the term of the service contract. To qualify for the method, (i) the service contract must provide for similar services on a regular basis (e.g., weekly or monthly), (ii) each occurrence of service must provide independent value, and (iii) the term of the contract must not exceed 12 months (excluding renewals). Under these terms, for example, a contract to provide daily janitorial services for twelve months would qualify.
The new safe harbor is effective for taxable years ending on or after July 30, 2015 (e.g., the 2015 calendar year). Existing taxpayers who would like to change the treatment of ratable service contracts to conform to the safe harbor will need to apply for a change in accounting method on Form 3115. The change is automatic and will not require the payment of a user fee.
1 Rev Proc. 2015-39
Questions? Contact your Berdon advisor.