Safe harbor for accounting for ratable service contract-related liabilities

Ratable service contract-related liabilities

The IRS today released an advance version of Rev. Proc. 2015-39 that provides a safe harbor for an accrual method of accounting taxpayer that wants to change its method of accounting for liabilities arising from services provided to the taxpayer under a “ratable service contract.”

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The safe harbor provided under Rev. Proc. 2015-39 [PDF 39 KB] allows the taxpayer using an accrual method of accounting to treat economic performance as occurring on a ratable basis for certain service contracts. Rev. Proc. 2015-39 clarifies that a taxpayer may treat economic performance as occurring on a ratable basis over the term of the service contact.

Rev Proc. 2015-39 also includes procedures for obtaining the automatic consent of the IRS Commissioner to change to this method of accounting.


In general, the amount of any deduction or credit must be taken for the tax year according to the taxpayer’s method of accounting. Accrual method taxpayers generally must take into account a liability that is incurred in the tax year when (1) all events have occurred to establish the fact of the liability and (2) the amount of the liability can be determined with reasonable accuracy—both comprised of the “all events test”—and economic performance has occurred with respect to the liability.

There are two exceptions to the general rule of determining economic performance, and these exceptions—the 3½ month rule and the recurring item exception—allow a taxpayer to accelerate the accrual of a liability into the prior year.

To date, neither the Code nor regulations explain when a person has provided services for purposes of satisfying the economic performance requirement in the context of a “ratable service contract”—defined as:

  • A contract providing for similar services to be provided on a regular (daily, weekly or monthly) basis;
  • Each occurrence of the services provides “independent value” that is not dependent on any prior or subsequent service; and
  • The term of the contract does not exceed 12 months (without regard to contract renewal provisions).

If a single contract includes both services that satisfy these three criteria and other service items that do not meet these requirements, the eligible services must be separately priced in the contract in order for that contract to qualify as a “ratable service contract.”

Rev. Proc. 2015-39 includes examples to illustrate its application.

Change in method of accounting

Rev. Proc. 2015-39 provides that a change in the treatment of ratable service contracts to conform to the safe harbor method is a change in method of accounting pursuant to sections 446 and 481 (and regulations). A taxpayer that wants to change to the method of accounting pursuant to Rev. Proc. 2015-39 must use the automatic change procedures of Rev. Proc. 2015-13 and Rev. Proc. 2015-14 (which is amended to reflect today’s guidance).

Rev. Proc. 2105-39 is effective for tax years ending on or after July 30, 2015.

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