Revenue Procedure 71-21 for Advance Payment Deferral
Examine the tax principles for deferring advance payment income, tracing the one-year method's evolution from Rev. Proc. 71-21 to current regulations.
Revenue Procedure 71-21 was a rule from the Internal Revenue Service that addressed when a business should report income received for services it would perform in the future. This guidance permitted certain businesses to postpone reporting these advance payments, providing a framework for how to account for payments received in one tax year for work completed in a subsequent year.
The One-Year Deferral Method
The core of Revenue Procedure 71-21 was its one-year deferral method. This approach allowed a business to split an advance payment between two tax years. The portion of the payment earned in the year of receipt was included in that year’s gross income. The remaining unearned portion could be deferred but had to be recognized as income in the following tax year, regardless of whether all services were complete.
For example, a company that received $12,000 in October for a 12-month service agreement would recognize the income earned for October, November, and December of the current year, which is $3,000. The remaining $9,000 would be deferred and reported as income in the following tax year. This mechanism aligned income recognition more closely with the period in which the services were actually rendered.
Eligibility and Limitations
The deferral method was not universal and came with specific requirements. It was available only to taxpayers using an accrual method of accounting, which recognizes income when it is earned rather than when it is received. The method was intended for payments related to future services.
Deferral was only permissible if all related services were contractually required to be finished by the end of the taxable year following the year the payment was received. If a service agreement extended beyond that timeframe, the entire advance payment had to be included in income in the year it was received.
Current Rules Under Section 451(c)
Revenue Procedure 71-21 was updated and superseded by guidance that expanded the deferral rules to include advance payments for goods and other items, not just services.
The Tax Cuts and Jobs Act of 2017 codified this framework into law under Internal Revenue Code Section 451(c). Detailed Treasury regulations for this rule apply to tax years beginning on or after January 1, 2021.
Under Section 451(c), an accrual-basis taxpayer can elect to defer including an advance payment for goods, services, and other items in gross income until the taxable year after it is received. While Revenue Procedure 71-21 is now historical, its one-year deferral concept continues under the broader framework of Section 451(c).