SECTION 4. SAFE HARBOR

METHOD

.01 In General . Under the safe harbor method of accounting for Ratable Service Contracts, as defined in section 4.02, a taxpayer may treat economic performance as occurring on a ratable basis over the term of the service contract.

.02 Ratable Service Contract . For purposes of this revenue procedure, a contract is a Ratable Service Contract if: (1) the contract provides for similar services to be provided on a regular basis, such as daily, weekly, or monthly; (2) each occurrence of the service provides independent value, such that the benefits of receiving each occurrence of the service is not dependent on the receipt of any previous or subsequent occurrence of the service, and; (3) the term of the contract does not exceed 12 months (contract renewal provisions will not be considered in determining whether a contract exceeds 12 months). If a single contract includes services that satisfy the requirements of this section and services (or other items) that do not satisfy the requirements of this section, the services (or other items) that do not satisfy the requirements of this section must be separately priced in the contract for the contract to qualify as a Ratable Service Contract.

.03 Examples . The following examples illustrate the application of the safe harbor method of accounting for Ratable Service Contracts. In each example the taxpayer uses an accrual method of accounting for federal income tax purposes, including the use of the 3½ month rule and the recurring item exception, and files its returns on a calendar year basis.

Example 1 . On December 31, 2015, Taxpayer enters into a one-year service contract with X . Under the contract, X will provide janitorial services on a daily basis to Taxpayer until the end of 2016. Under the contract, Taxpayer pays X $3,000 a month to clean Taxpayer’s offices. The contract requires Taxpayer to pay for each month’s service by the end of the prior month. On December 31, 2015, Taxpayer makes a $3,000 payment to X for the services to be provided in January 2016. Taxpayer reasonably expects X to provide the janitorial services in January. As of December 31, 2015, all events have occurred to establish the fact of Taxpayer’s $3,000 contractually-required payment and the amount of the liability is determinable with reasonable accuracy.

The contract meets the requirements of a Ratable Service Contract in section 4.02 of this revenue

procedure because the janitorial services are to be provided on a regular basis (daily); each daily occurrence of the janitorial service provides independent value, such that the benefits from each occurrence of the service are not dependent on the receipt of previous or subsequent janitorial services; and the contract term does not exceed 12 months. Under the provisions of this revenue procedure, Taxpayer may treat economic performance as occurring ratably under the contract. Thus, under the 3½ month rule Taxpayer is allowed to incur a liability in 2015 for the $3,000 paid in 2015. For the services provided from February through December 2016, economic performance occurs ratably as the services are provided to Taxpayer each day, and a liability of $33,000 for these services is incurred in 2016.

Example 2 . On December 31, 2015, Taxpayer enters into a one-year service contract with X . Under the contract, X will provide landscape maintenance services to Taxpayer from January through December 2016 on a monthly basis. Under the contract Taxpayer pays X $4,000 a month to maintain Taxpayer’s grounds. The contract requires Taxpayer to prepay for the twelve months of services with the full payment of $48,000 due on December 31, 2015. On December 31, 2015, Taxpayer makes the $48,000 payment to X for services to be provided from January 1, 2016, through December 31, 2016. As of December 31, 2015, all events have occurred to establish the fact of Taxpayer’s $48,000 contractually-required payment and the amount of the liability is determinable with reasonable accuracy.

The contract meets the requirements of a Ratable Service Contract in section 4.02 of this revenue procedure because the maintenance services are to be provided on a regular basis (monthly); each occurrence of the maintenance service provides independent value, such that the benefits from each occurrence of the service are not dependent on the receipt of prior or subsequent maintenance services; and the contract term does not exceed 12 months. Under the provisions of this revenue procedure, Taxpayer may treat economic performance as occurring ratably under the contract. Assuming that Taxpayer satisfies the requirements of the recurring item exception, as described in section 2.09 of this revenue procedure, and files its return on September 15, 2016, Taxpayer is allowed to incur a liability in 2015 of $34,000 (8.5 months/12 months x $48,000) for the services provided from January 1 through September 15, 2016. For the services provided from September 16 through December 31, 2016, the period outside of the recurring item exception, economic performance occurs ratably as the services are provided to Taxpayer during that time and a liability for these services of $14,000 (3.5 months/12 months x $48,000) is incurred in 2016.

Example 3. On November 30, 2015, Taxpayer enters into a one-year contract for an environmental impact study with Y. Under the contract, Y must complete and deliver the study by November 30, 2016. In exchange, Taxpayer will pay Y $100,000 when the contract is signed and $400,000 when the study is delivered on November 30, 2016. Taxpayer makes the payments on the specified dates. Y performs work on the study during 2015 and 2016 and delivers the completed study to Taxpayer on November 30, 2016. On November 30, 2015, all the events

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Example 5. Same facts as Example 4, except that under the service contract the HR software development service is separately priced at $12,000, with $1,000 of the $3,000 monthly payment allocated to the software development service. The IT services described in the contract meet the requirements for a Ratable Service Contract in section 4.02 of this revenue procedure because the IT services are provided on a regular basis (daily); each daily occurrence of IT service provides independent value, such that the benefits from each occurrence of the service are not dependent on the receipt of prior or subsequent IT services; and the contract term does not exceed 12 months. Under the provisions of this revenue procedure, Taxpayer may treat economic performance for the IT services as occurring ratably under the contract. Taxpayer incurs a liability in 2015 for $2,000 of the $3,000 payment for IT services under the 3½ month rule. For the IT services provided from February through December 2016, economic performance occurs ratably as the services are provided to Taxpayer each day and a liability of $22,000 for these services is incurred in 2016. For the HR software development service liability, economic performance occurs when the service is completed and a liability of $12,000 for this service is incurred upon completion.