Deferred Revenue question

[Dave161]

I'm looking for advice, I have a subscription service for streaming content. I charge a subscription fee. Fee is paid in advance (Monthly, Quarterly, Annually). I pay the content creators each months by the number of subscribers. If I use acrual accounting can I report revenue to the IRS on the partial paid amount ? 

Subscriber purchased annual subscription in October and paid $120 (so $10/month for 12 months upfront pay). I provide the service over the next 12 months. I am thinking I need to use deferred revenue.

I read this article that says I only need to report revenue for the year I gave service so even though I got paid this year, I can report the partial income of the services that will be given next year, on next year's tax.

Can I report this year revenue for taxes as $30 and next years revenue $90 ? 

[DaveF1006]

It depends if you use the cash basis of accounting or the accrual method. Most Taxpayers use the cash basis thus you will report the income received in year 2020. if you use the accrual method, then you will report your income as you suggested.

[Mike9241]

Court cases would disagree

AAA vs. United States, 367 U.S. 687 (1961)

Prepaid membership dues received by an auto club one year in advance were includible in income by an accrual basis taxpayer, since they are held under a claim of right without restriction on their disposition.

Automobile Club of Mich. vs. Comm. 353 US 180 (1957)

Membership dues received one year in advance by an automobile club were includible in income in the year received by an accrual basis taxpayer because the dues were held under a claim of right without restriction of their disposition.

Comm. vs. Indianapolis Power & Light Co. 110 S. Ct. 589 (1990)

The U.S. Supreme Court made a distinction between the taxation of refundable deposits. The Court confirmed advance payments are generally taxable and defined "advance payments" as a non-refundable payment. With a nonrefundable payment the payee is "guaranteed" it can keep the money as long as the payee performs its own obligation under the contract.

so I disagree with the other advice. it's taxable in the year received.

[Rick19744]

I am going to disagree with both, but in the end, I believe you most likely can defer the recognition of your advance payments.

Under the accrual method of accounting, gross income is recognized “when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy.”

When an accrual basis taxpayer is paid for goods or services to be furnished in the future, the receipts arguably should only be accrued when the taxpayer performs its side of the bargain. Deferring recognition until then is more likely to match the revenue against the taxpayer's expenses than accruing the funds when received.

The 3 Supreme Court cases noted did not agree with the above, however, each was based on facts different to your facts. 

Automobile Club of Michigan and American Automobile Association were cases on prepaid membership dues, not really your facts.  The Court noted that a pro rata allocation of membership dues in monthly amounts over the membership year is purely artificial and bears no relation to the services which may in fact be called upon to render for the member.

In a strange about face, the IRS amended the regulations and permitted deferral , subject to certain conditions.

Additionally, for taxable years beginning after 2017, Section 451(c) codifies the one-year deferral method of accounting for advance payments.  This, however, requires an election should you qualify.

Obviously this forum is not conducive to understanding your particular set of facts and provide guidance on language for the election should you qualify.

I recommend you meet with a tax professional, discuss your facts and get one on one guidance for this matter.