With respect to the prepaid income from services, which of the following is true?

Question

a. The treatment of prepaid income is the same for tax and financial accounting.
b. A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
c. An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
d. An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less.
e. None of these.

Answer 1

c
RATIONALE: Answer a. is incorrect because the tax treatment is based on the income tax provisions, whereas the financial accounting treatment is based on generally accepted accounting principles. Answer b. is incorrect because the cash basis taxpayer recognizes the income in the year of receipt. Answer c. is correct because under Revenue Procedure 2004-34 any unearned income at the end of the first tax year must be included in the gross income of the second tax year. Answer d. is incorrect because there is no three-year provision. The deferral possibilities for services to be provided exist only in the case of accrual basis taxpayers who satisfy the requirements of Revenue Procedure 2004-34.