As a Cash Basis taxpayer, you are entitled, to deduct expenses WHEN paid and incurred. 

Prepaying expenses involves paying for goods or services in the current tax year that you'll use in the next tax year. 

This strategy can accelerate deductions and lower your current year's taxable income.  As a general rule, if you are having an "up" year this year OR expect next year to be a lower year, this is a tremendous strategy. 

• 12-Month Rule: The IRS generally allows a deduction for prepaid expenses only to the extent they apply to the period ending on the last day of the 12-month period after the payment date.  For example, you cannot pay 5 years of rent expense in December!
  
  
• Economic Performance Rule: Some expenses must meet this rule, meaning the tax benefit is only available when the service is performed or the property is used.

1. Rent: Paying next year's rent in advance can be a deductible expense.   As a basic rule, try to pay January rent on December 31!
   
   
2. Insurance Premiums: Prepaying insurance premiums for the next year.
   
   
3. Office Supplies: Bulk purchasing of office supplies needed for the upcoming year.
   
   
4. Professional Fees: Prepaying fees for accounting, legal, or consulting services to be received in the next year.
   
   
5. Subscription Services: Annual subscriptions for business-related software or publications.
   
   
6. Interest on Loan: Check to see if your bank allows for an interest-only payment.  If so, make a large I/O payment on Dec 31.

1. Rent Prepayment:
   • If your business rents office space for $10,000 a month, consider paying January's rent in December to add an additional $10,000 deduction for the current year.  
     
     
2. Insurance Premiums:
   • Suppose you have a $12,000 annual business insurance premium due in January. Pay it in December to claim the deduction a year earlier.
     
     
3. Bulk Purchase of Office Supplies:
   • If you anticipate needing $5,000 in office supplies next year, buying them in December allows you to deduct the expense in the current tax year.

• Credit Card or Line of Credit:  At Anomaly, we are supportive of incurring the expense on a credit card OR LOC in December and then paying off in January.  The best of both worlds!  You get the tax deduction, preserve the cash temporarily and incur little to no interest.
  
  
• Immediate Tax Relief: Reduces taxable income for the current year.  However, if NEXT YEAR will be a higher income year, you may want to forgo this. 
  
  
• Cash Flow Management: Requires careful planning to ensure it doesn't negatively impact your business's cash flow.

As a general rule, if you have the ability to deposit a check in the current year, it is income!  The only way you can legally defer income is to hold off on invoicing your client or customer until the next year.  If they send you money this year AND it arrives before 12/31, you MUST count this as income. 

• Document Everything: Keep detailed records of what you've prepaid, including invoices and receipts.
  
  
• Evaluate Business Needs: Only prepay for expenses you're certain you'll need.  Don't spend a dollar to save .25 cents if you don't need it!

Prepaying certain business expenses can be a beneficial tax strategy, but it requires careful consideration of your business's financial position and adherence to IRS rules. By

If you are considering making large year-end pre-payments, PLEASE contact our team on Soraban!