Generally an expense cannot be deducted if paid in advance. The prepaid amount is treated as an asset with a useful life extending beyond the current tax year, and carried over to the tax year where the expense applies.
However
Twelve month rule exception:
The rule does not apply if the prepaid amount does not extend beyond 12 months after the benefit begins. Paying a 12 month insurance policy or 12 month licensing fee, for example, is generally deductible when the payment is made.
Insurance is a prepaid expense, because the purpose of purchasing insurance is to buy proactive protection in case something unfortunate happens. Clearly, no insurance company would sell insurance that covers the occurrence of an unfortunate event, after the fact, so insurance expenses must be pre-paid.
Expense paid in advance.
An expense you pay 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.
