Question

On Dec. 15, 2019, Julie’s Tax Prep, a cash-method taxpayer, prepaid $4,000 worth of deductible interest on a business loan. The interest won’t accrue until January 2020. Julie’s Tax Prep will be displaying for the first time at a trade show in July 2020. On Dec. 16, 2019, Julie’s prepaid the $8,000 trade show booth rental expense. The payment isn’t due until May 2020, and the use of the booth will occur in July 2020. In addition, On Dec. 28, 2019, Ed’s Equipment repaired some equipment in Julie’s office and billed Julie’s $2,000. Julie’s received the invoice on Dec. 28, 2019, and paid the $2,000 invoice on Jan. 29, 2020. How much of the $14,000 in deductible business expenses may Julie’s Tax Prep deduct in 2019?

Note the answer is not $12000

Answer 1

Julie’s Tax Prep deductible business expenses in 2019 = $4,000

An expense paid in advance is deductible only in the year to which it applies unless the expense qualifies for the 12-month rule. Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following.

• 12 months after the right or benefit begins, or

• The end of the tax year after the tax year in which payment is made.