Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Rev. Proc. 97-38 provided for an alternative reporting method, the "Service Warranty
Income Method" (SWIM). Taxpayers who elect SWIM may spread a portion of the service
warranty contract income over the life of the contract. The amount of income that can be
deferred is equal to the amount that is paid by the taxpayer to an unrelated third party to
insure the taxpayer’s obligations under their contracts. The amount qualifying for deferral is
called the "Qualified Advance Payment Amount."
Dealerships that elect to defer the qualified advance payment amount must increase the
income to be reported by adding on an imputed income amount on a level basis over the
shorter of the actual term of the service warranty contract or a 6 taxable-year period.
In addition to automobile dealers, manufacturers and wholesalers may use SWIM for fixedterm
service contracts on motor vehicles or other durable consumers goods purchased by a
customer with a separately stated amount for the service warranty contract if the taxpayer
purchases insurance from an unrelated third party and makes payment to the insurer within 60
days after the receipt of the advance payment for the insurance costs associated with the
policy.
In general, this method of accounting permits these taxpayers to recognize and include in
gross income, generally over the period of the extended service contracts, a series of equal
payments, the present value of which equals the portion of the advance payment qualifying
for deferral.
The Service Warranty Income Method (SWIM) was originally implemented in Rev. Proc. 92-
98 (superceded by Rev. Proc. 97-38.) For complete information on the implementation of the
Service Warranty Income Method please see the revenue procedures.
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