In general, a business is entitled to a deduction for legitamate business expenses that are paid in advance if the business has elected to be treated as a cash basis entity.
However, these prepayments have to be reasonable, the taxpayer cannot deduct rent paid that is paid 12 months in advance. There is sufficient case law that allows taxpayer to deduct 11 months in rent, but not 12 months.
Professional accounting firms in general, have allowed clients to deduct prepaid rents, one month of utilities expense, telephone, cell phone bills, prepayment of operatiing expenses, prepaid outside consultants bills etc.
One would generally assume that it would not be sound business practice to prepay substantially most of the following years business expenses!
First of all, the business would end up consuming substantial free cash flow from operation.
Secondly, the business would end up presumably with either reduced profit or negative profit, both of these would result in poor credit scores for the business. When the business is seeking loans or lines of credit from a financial institution it would be very difficult for the business to obtain reasonable terms for these instruments.
Last edited by TaxGuru : 02-09-2007 at 12:02 AM.