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. Suppose your fiscal year-end is December 31, 2024. On June 30, 2024, you prepay the rent on your building for a full year (July 1, 2024, to June 30, 2025). You can only deduct one-half of this rent as an expense in 2024. You can deduct the other half as an expense in 2025.
Example
Maria paid $2,100 for insurance on her rental property. The insurance was for the current tax year and the two following years. Although she paid the insurance for three years, because she is using the accrual method, she can deduct only the part that applies to the current tax year from her gross rental income. Therefore, Maria can deduct $700 in the current tax year and $700 in each of the following two years.
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.