Prepay business expenses for extra tax deductions

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Real Estate Tax Talk

By Stephen Fishman, Friday, December 21, 2012.

Inman News®

If you’re in need of extra business deductions for 2012, one method is to prepay some of your business expenses for future years, such as business insurance or rent.

However, there are some tricky rules you need to be aware of to deduct such payments this year.

The general rule is that you can’t prepay business expenses for a future year and deduct them from the current year’s taxes. An expense you pay in advance can be deducted only in the year to which it applies.

For example, if you pay a two-year lease in advance, you could only deduct the portion of the lease payment that applies to the current year.

However, there’s an important exception called the 12-month rule. It lets you deduct a prepaid future expense in the current year if the expense is for a right or benefit that extends no longer than the earlier of 12 months, or until the end of the tax year after the tax year in which you made the payment.

Example 1: You’re a calendar-year taxpayer and you pay $10,000 on Dec. 31, 2012, for a business insurance policy that’s effective for one year beginning Jan. 1, 2013 and ending on Dec. 31, 2013. The 12-month rule applies.

The benefit you’ve paid for — a business insurance policy — does not extend more than 12 months beyond Jan. 1, 2013 (the first date you realized the benefit from the policy). Nor does it extend beyond the tax year following the year the payment was made (which would be tax year 2014 or later). Therefore, the full $10,000 is deductible in 2012.

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