The Internal Revenue Service is providing a safe harbor for contracts on services that are performed on a regular basis such as janitorial and landscape maintenance and software support.
Revenue Procedure 2015-39 provides a safe harbor for accrual method taxpayers to treat economic performance as occurring ratably on contracts that provide services on a regular basis. In other words, under the safe harbor, a taxpayer can ratably expense the cost of regular and routine services as the services are provided under the contract.
Contracts for regular janitorial or landscape maintenance services are typical examples of contractual services that may qualify for the safe harbor, the IRS pointed out. Another example provided is for IT support and maintenance for human resources software.
A service contract that provides for a single product to be delivered to the taxpayer, such as an environmental impact study, will not satisfy the definition of a Ratable Service Contract because the contract does not provide for services to be provided on a regular basis. The revenue procedure defines a Ratable Service Contract and provides examples of contracts that will and will not satisfy the definition.
The revenue procedure also includes examples of bundled service contracts, which provide for both regular and one-time services. Whether part of a bundled service contract qualifies as a Ratable Service Contract depends on whether the parties have separately priced the services specified in the contract, the IRS noted.
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