General Consultant Discussion

Given the very likely pending tax law changes, is there any logic to offering clients to prepay multiple years of support or phone support (to you) in advance to buy large blocks of time? This would let them reduce their income in 2017, but increase it in 2018, but for many, at a much lower rate.

If they are accrual basis accounting (GAAP) in most cases, it doesn't matter. Revenue is recognized when earned and expenses are recognized when incurred, not when cash is received or paid.

Generally prepaid services can be deducted, if they are used within 12 months of payment (12 month rule). On the other hand, if you were to propose this AND the client was selected by the IRS for a review or audit of their returns AND it looked like the purchase of prepaid block of time was an effort to avoid tax, it is something that could come back bite you. Tax situations are generally unique. Some may benefit others may not from prepaying.

So we could suggest a year. Let them know 3 & 5 are available, but not say if they could deduct it.

Always offer to take their money in advance but make it very clear this is NOT tax advice....

Of course if you are a cash basis taxpayer (accrual for books and cash for tax) you can always deduct payments when they are incurred. For accrual basis taxpayers, the 12 month rule is an exception to the capitalization of prepaid expenses. One of the requirements for an accrual basis taxpayer to deduct an accrued but unpaid expense is that ""economic performance"" must have been met with regard to the liability in the year of accrual. Economic performance standards depend on the type of good or service. Economic performance occurs for a service provider when the services are provided. This is a link to a Forbes article. About half was down is an example of an advertising agency receiving a $20K prepayment in December and the services are provided in the following year. The prepayment is deemed nondeductible because the economic performance standard has not been met when the payment was made. https://www.forbes.com/sites/anthonynitti/2015/05/25/tax-geek-teusday-when-can-a-business-deduct-prepaid-expenses/#495b462c1432

As the article points out, there is an exception to the economic performance rule if the expense is deemed to be a recurring expense. So, if you classify a tech support agreement as a recurring expense then there would be an exception and the prepaid is probably deductible. Pretty complex and open to some interpretation of how one defines recurring (support issues are not recurring but the payments are).