If you want to take advantage of business deductions before the end of the year, you may decide to prepay some of your expenses. But, hold up! Before you do that, you need to learn about the 12-month rule for prepaid expenses.

What are prepaid expenses?

So, what do prepaid expenses include? Prepaid expenses are expenses you pay for in advance before receiving a product or service. Any time you pay for something in advance, you must record it in your books as aprepaid expenses journal entry.

预付费用可以包括但不限于：

• Rent
• Small business insurance
• 设备
• Estimated taxes
• Some utility bills
• Interest expenses

Businesses and individuals alike can have prepaid expenses. If your business pays for products or services in advance before receiving them, you have a prepaid expense.

What is the 12-month rule?

如果你使用cash method of accounting, you deduct expenses in the tax year you actually pay them. But, you may not be able to deduct an expense you pay in advance, aka a prepaid expense.

A prepaid expense is only deductible in the year to which it applies, unless it qualifies for the 12-month rule…

Under the IRS 12-month rule, a taxpayer can deduct a prepaid expense in the current year if the rights or benefits for the taxpayer do not extend beyond theearlierof:

• 12 months after the right or benefit begins或者
• 结束的税year after the tax year in which payment is made

您可以使用12个月的商业保险费规则，business licenses，租金和租赁付款，并付款终止业务合同。但是你cannot使用规则进行利息，贷款和其他经济利益，或购买家具，设备和其他长期资本资产。

If you use cash-basis accounting, you can deduct prepaid expenses as long as the 12-month rule applies.

在其他情况下，您可能需要使用一般规则。根据一般规则，您可能不会扣除超过12个月的预付款的全额支付。而且，您必须根据适用的一年扣除一部分付款。

如果您没有使用12个月的规则和/或一般规则，请在使用之前与IRS联系以获得批准。

For more information on the 12-month rule for prepaid expenses, check outPublication 538.

12-Month rule: Examples

The 12-month rule scrambling your brain? Don’t worry—you’re not alone. To make sense of the rule, let’s take a look at a couple of examples of how it all works.

Example 1

假设您的业务于2021年12月31日支付5,000美元，以便为1922年1月1日起生效的保险单，2022年12月31日。

Because the benefit (aka insurance policy) does not go past a 12-month period or beyond the end of the taxable year following the year the payment was made, the 12-month rule applies. And, the full $5,000 is deductible in 2021.

Example 2

You’re a cash-basis taxpayer using a calendar year. On September 1, 2021, you pay $1,000 for business insurance covering the first six months of 2022 (January through June 2022).

In this situation, the 12-month rule applies even though the benefit begins in the new year because it does not extend beyond the end of 2021. Deduct the full $1,000 in 2021.

一般规则：示例

您是日历年纳税人，并在2021年支付6,000美元的保险单，这是有效的三年（或36个月）。该政策开始于2022年7月1日。

In this situation, the 12-month rule does not apply. Instead, the general rule that an expense paid in advance is only deductible in the year to which it applies is applicable.

因为您需要遵循一般规则，只有1,000美元[（​​6个月/ 36个月）x $ 6,000]在2022年可扣除。2023年和2024年，只有2,000美元可扣除[（12个月/ 36个月）x $ 6,000]及其剩余时间1,000美元可扣除2025年（6,000美元 - 1,000美元 - 2,000美元 - 2,000美元）。

How does the 12-month rule work for accrual accounting?

The 12-month rule works differently foraccrual-basistaxpayers. So, listen up.

There are two tests your business must pass before you can apply the 12-month rule:

• All events test
• 经济绩效考试

Generally, the taxpayer cannot deduct a prepaid expense until the obligation to pay is fixed (all events have occurred to establish liability), the cost is determinable, and the taxpayer actually receives the prepaid product or service (economic performance).

Some cash payments can result in economic performance, including insurance contracts, warranty contracts, taxes, andworkers’ compensationliability.

Say you pay $20,000 on December 31, 2021 for property taxes that cover the first six months of 2022 (January – June). Because taxes count as economic performance, you can deduct the prepaid property tax expense in 2021.

This is not intended as legal advice; for more information, please点击这里。