Prepaid expenses

A prepaid expense is an expense you paid for ahead of time. Under the accrual method of accounting, claim the expense you prepay in the year or years in which you get the related benefit.

Example

Suppose your fiscal year end is December 31, 2018. On June 30, 2018, you prepay the rent on your building for a full year (July 1, 2018, to June 30, 2019). You can only deduct one half of this rent as an expense in 2018. You can deduct the other half as an expense in 2019.

Under the cash method of accounting, you cannot deduct a prepaid expense amount (other than for inventory) relating to a tax year that is two or more years after the year the expense is paid. However, you can deduct the part of an amount you paid in a previous year for benefits received in the current tax year. These amounts are deductible as long as you have not previously deducted them.

Example

If you paid $600 for a three‑year service contract for office equipment in 2018, you can deduct $400 in 2018. This represents the part of the expense that applies to 2018 and 2019. On your 2020 income tax return, you could then deduct the balance of $200 for the part of the prepaid lease that applies to 2020.

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