Nonaccrual-experience book safe-harbor method.

• Author: Van Leuven, Mary

Taxpayers generating revenues from services may now be able to use the nonaccrualexperience (NAB) book safeharbor method to exclude qualifying uncollectible revenues from taxable income. As this item explains, qualifying for this re-cently established book safeharbor method is easier than qualifying for other safeharbor methods, but other complexities still face taxpayers using the safe harbor.

In September 2011, the IRS released Rev. Proc. 2011-46, which provided a book safeharbor method for taxpayers accounting for revenues using the NAE method. The safe harbor allows eligible taxpayers to compute uncollectible revenues by applying a factor of 95% to their allowance for doubtful accounts as determined through the taxpayer's applicable financial statements.

The NAE Method

Sec. 448(d)(5) allows accrual-method taxpayers to use the NAE method to account for the noncollectibility of certain service-related revenues based on the taxpayer's experience. If applicable, the NAE method allows taxpayers to exclude amounts from income when collection is not expected. The NAE method is available only to taxpayers performing services and either qualifying under an annual $5 million gross receipts test or delivering those services in health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.

Generally, the gross receipts test is satisfied for any prior tax year if the average annual gross receipts for the three-tax-year period ending with the prior tax year does not exceed $5 million. The gross receipts of all entities treated as a single employer are aggregated for the purposes of the test. Taxpayers may not use the NAE method for overdue amounts on which the taxpayer charges interest or penalties.

In 2006, Treasury finalized Regs. Sec. 1.448-2, which contains four specific safe harbors related to the NAE method. These safe-harbor methods are often cumbersome for taxpayers. For certain computations, the methods require taxpayers to track financial information for six years. Acquisition of a new company or business can produce additional issues, as taxpayers might have difficulty finding necessary historical information. In many instances, eligible taxpayers do not use the NAE method because of the complexity surrounding the safe harbors.

The NAE Book Safe-Harbor Method

Rev. Proc. 2011-46 establishes an additional NAE book safe harbor method, which appears somewhat simpler than the existing safe harbors, as it...