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

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,

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 of the following may be eligible to make the election:

* Services;

* Merchandise (if not already deferred under Regs. Sec. 1.451-5(b) (1)(ii));

* Use of intellectual property;

* Occupancy or use of property, if ancillary to the provision of services;

* Sale, lease or license of computer software;

* Guarantee or warranty contracts ancillary to items(s);

* Subscriptions, if Sec. 455 is not elected; and

* Membership in an organization, if Sec. 456 is not elected.

This includes, for example, professional service firms and others offering services to consumers; software firms and Internet service providers; insurance administrators; and membership organizations. The following are not eligible: rent (unless ancillary to services provided for sale/lease of software or occupancy/use of property), insurance premiums, and payments (1) with respect to financial instruments; (2) for service warranty contracts for which income is recognized over the contract's life (in accordance with Rev. Proc. 97-38); (3) to which Sec. 83 applies (i.e., property transferred for the performance of services); and (4) to foreign nonresident aliens or foreign corporations for which withholding is required.