How to deduct prepaid expenses

A prepaid expense is an expense you pay for ahead of time. Under the accrual method of accounting, claim any expense you prepay in the year or years in which you get the related benefit.

 For example, suppose your fiscal year-end is December 31, 2012. On September 30, 2012, you prepay insurance premium of $1,200 for a full year (October 1, 2012 to September 30, 2013). You can only deduct $300 as insurance expense in 2012. And the rest of $900 can be deducted in 2013.



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