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Cash or accrual basis tax treatment on deferred support/maint revenue?

Bryan Frey's Profile

accounting for deferred & unbilled revenueIn a software company, we will defer support/maintenance revenues collected in advance, and recognize the revenues over the course of the contracted for period (generally a year but sometimes even longer). Would the tax treatment for this be the same or is the company expected to recognize the revenues for income tax purposes on a cash basis?

Answers

Topic Expert
Vernon Reizman
Title: CFO
Company: RCM Industries, Inc.
(CFO, RCM Industries, Inc.) |

Assuming you file your tax return on the accrual basis the tax revenue (and related expenses)would also be reported on an accrued basis. I think though if you have already filed a return on cash basis you will need to file for an accounting chnage with your next tax return.

Stewart Edelman
Title: CFO
Company: Ericom Software
(CFO, Ericom Software) |

Hello there;

Vernon has addressed the matter correctly with one slight additional catch. There is an IRS revenue procedure #2004-34 that allows taxpayers, who receive advance payments for services and goods in the tax year, to defer the taxability of the item to the next tax year if it was recorded that way in the financial statements (i.e. as deferred revenue in the liabilities and not as income on the P&L). The one catch is that if part of the deferred revenue is long term (i.e. covers a period beyond the next tax year), you will have to recognize the long term element in the subsequent tax year.

For example – I sell a software maintenance contract for two years on Dec 1, 2011.
For book purposes
I would recognize 1/24rth in 2011
I would recognize 12/24rth in 2012
I would recognize 11/24rth in 2013

For Tax purposes
I would recognize 1/24rth in 2011
I would recognize 23/24rth in 2012
I would recognize ZERO in 2013

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