![]() There are two tests that must be met before the taxpayer can apply the 12-month rule. The All Events Test & Economic Performance Testįor accrual-basis taxpayers, the rules are more complicated. Since the benefit of the insurance policy does not extend more than 12 months or beyond the end of the taxable year following the year the payment was made, the 12-month rule applies and the full $10,000 is deductible in 2021. the end of the taxable year following the taxable year in which the payment is made.įor cash basis taxpayers, prepaid expenses can be deducted as long as the 12-month rule is met.Įxample: Calendar-year cash basis taxpayer SmallCorp pays $10,000 on December 31, 2021, for an insurance policy that is effective January–December 2022.12 monthsfrom the date the prepayment is made, or.The “12-month rule” allows for the deduction of a prepaid expense in the current year if the right or benefit paid for does not extend beyond the earlier of: The following are general rules to qualify for the prepaid expense tax deduction and how they can impact your business. ![]() ![]() However, the IRS allows the accelerated deduction of certain prepaid expenses, with some complex restrictions involved. The general rule for prepaid expenses is that any prepayment for a service or benefit must be capitalized and amortized over the useful life of such payment. Accelerating deductions for prepaid expenses is a good way to save on your taxes for the current year. ![]()
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