FEDERAL TAX

Pennsylvania CPA Journal, April, 2007 by Blair, Larry S

IRS Details Contract Liability Guidelines for Accrual Basis Taxpayers

Taxpayers using the accrual method of accounting face many challenges when determining whether or not a liability meets the "all-events test" and is deductible in a particular year. New Revenue Ruling 2007-3 from the IRS provides significant insight into the agency's view of contractual liability, and may provide taxpayers with an opportunity to possibly restructure a contract so that it may provide for an accrual in the year in which the contract is entered into.

Internal Revenue Code Section 461(a) states that a deduction must be taken for the taxable year that is the proper taxable year under the method of accounting used by the taxpayer to compute taxable income. For the accrual method of...