SECTION 4. APPLICATION

.01 NAE book safe harbor . (1) In general . A taxpayer within the scope of this revenue procedure may compute its uncollectible amount under the NAE book safe harbor method by multiplying the portion of the year-end allowance for doubtful accounts on the taxpayer’s applicable financial statement that is attributable to current year NAE-eligible accounts receivable by 95 percent. A taxpayer using the NAE book safe harbor is generally subject to the rules in § 1.448–2; however, the NAE book safe harbor is not subject to the self-testing requirements of § 1.448–2(e).

(2) Allowance for doubtful accounts . For purposes of this revenue procedure, an allowance for doubtful accounts on a taxpayer’s applicable financial statement must represent the amount of outstanding accounts receivable the taxpayer anticipates it will not collect. Therefore, an allowance that is computed to maximize the deferral of taxable income under this revenue procedure and does not represent the amount of outstanding accounts receivable the taxpayer anticipates it will not collect

October 17, 2011 518 2011–42 I.R.B.

ilarly qualified independent professional), that is used for —

(a) Credit purposes, (b) Reporting to shareholders, or (c) Any other substantial non-tax purpose; or

(3) A financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agency (other than the SEC or the Internal Revenue Service).

.03 Examples . Example 1. Application of NAE book safe har- bor . (i) On December 31, 2011, the balance sheet in calendar-year Taxpayer’s applicable financial statement includes an allowance for doubtful accounts of $1,300,000. Of this balance, $300,000 represents the amount attributable to current year accounts receivable that Taxpayer anticipates it will not collect in the future.

(ii) Taking into account relevant information that is readily available, Taxpayer makes a reasonable determination that $200,000 of the $300,000 current year addition to the financial statement allowance for doubtful accounts is attributable to its current year NAE-eligible accounts receivable. Taxpayer computes the amount of income that it may exclude under the NAE book safe harbor method by multiplying the $200,000 increment to the financial statement year-end allowance for doubtful accounts attributable to current year NAE-eligible accounts receivable by 95%. Therefore, the amount of income that Taxpayer is not required to accrue for federal income tax purposes under section 448(d)(5) for the taxable year ending December 31, 2011, is $190,000 ($200,000 x 95%). Example 2 . Recoveries . (i) On December 31, 2011, the balance sheet in Taxpayer’s applicable financial statement includes an allowance for doubtful accounts of $1,300,000, representing outstanding accounts receivable that Taxpayer anticipates it will not collect in the future. During calendar year 2012, Taxpayer collects $100,000 of accounts receivable that had been included in its allowance for doubtful accounts.

(ii) Taking into account relevant information that is readily available, Taxpayer determines that $60,000 of the $100,000 financial statement recovery from the allowance for doubtful accounts is attributable to recoveries of NAE-eligible accounts receivable, all or a portion of which Taxpayer had properly excluded from income in a prior year under the NAE rules. As required by § 1.448–2(d)(5), Taxpayer must include the recovered amount in income in the taxable year ending December 31, 2012. The amount of additional income that Taxpayer must include under § 1.448–2(d)(5) is equal to the amount of the recovery that Taxpayer previously excluded from income under an NAE method. Thus, if in a prior year Taxpayer excluded 95% of the recovered $60,000 under the NAE book safe harbor method, Taxpayer is required to include $57,000 ($60,000 x 95%) in income in the taxable year ending December 31, 2012.