If you are in dire need of deducting additional expenses of your business before the end of a year, one way of doing so would be by making some payments beforehand for coming years, for instance – office, equipment, and business vehicle rent. However, there are few problematic parts you would like to be mindful of to reduce such payments each year.
The standard rule is that you cannot make advance payments for a future year and subtract them from running years’ taxes. Expenses you made beforehand will only be excluded in the year in which they were charged. For example, if you pre-pay a two-year rent, you will be allowed to deduct the rent payment percentage that applies to the on-going year.
There is a notable exception with the law known as the 12-month rule.” It allows you to exclude a prepaid cost in the present year if it is not for a benefit that continues beyond
- 12 months or
- until the conclusion of the tax year later than the tax year when the payment was made.
You can use a 12-month rule on insurance premiums for business. You can also use this for business authorization, rents, and charges to cancel business deals. However, you should bear in mind that you are not permitted to use this for interest payments, loans, buy furniture, and other long-term properties, including vehicles.
Example: You are a taxpayer who pays $1,000 every month rent for your company office. On December 31, 2020, you gave a rent payment of $12000 to your landlord, covering all your 2020 rent. The landlord, for some reason, does not receive the payment before January 2, 2021. The 12-month rule could be implemented here. The payment you have made does not expand beyond 12 months, i.e., January 1, 2020. Hence, the total $12,000 can be subtracted in 2020. Moreover, your landlord is not required to pay tax on the $12,000 until 2021 since he did not receive the payment until 2021.
Before paying in advance the cost of expenses in this way, let the payee — whether your landlord or any other company or individual — understand the thing you are doing. Else, they might not accept your payment considering it was mistakenly sent. There are plenty of owners and others who choose to take payment upfront.
Utilize U.S. Postal Benefit mail with tracking to prove the date when the mail was sent and the proof of receivable date.
Prepaying expenses entirely depends on the taxes you would have to pay this year and future years. If you anticipate your salary to rise significantly the following year, it might be wiser not to make any advance payment of expenses.