Prepay Expenses Using the IRS Safe Harbor
You have to thank the IRS for its tax-deduction safe harbors.
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2024 prepayments cannot go into 2026. This makes sense because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Tuesday, December 31, 2024, you mail a rent check for $36,000 to cover all of your 2025 rent. Your landlord does not receive the payment in the mail until Thursday, January 2, 2025. Here are the results:
You deduct $36,000 this year (2024—the year you paid the money).
The landlord reports $36,000 as rental income in 2025 (the year he received the money).
The landlord gets what he wants and likely more—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
Get the timing right. If the landlord is on the cash basis and received the $36,000 of rent paid in advance in 2024, he would have had to pay taxes on the rent money in 2024.
Don’t surprise your landlord. Before sending a big rent check to your landlord, make sure he understands the strategy. Otherwise, he might not deposit the rent check (thinking your payment was a mistake) and instead return the check to you. This could put a crimp in the strategy because you operate on a cash basis.
Also, think proof. Remember, the burden of proof is on you. How do you prove that you mailed the check on December 31? (Think like an IRS examiner or, better yet, a prosecuting attorney.)
Here’s the answer: send the check using one of the U.S. Postal Service (USPS) tracking delivery methods, such as priority mail with tracking and possibly signature required. Or even better, use one of the old standards that the IRS has to abide by, such as certified or registered mail.
With these types of mailings, you have proof of the date you mailed the rent check. You also have evidence of the date the landlord received the check.
If you are using USPS online tracking, make sure to print the delivery and receipt tracking results for your tax
records because that tracking information disappears from the postal service records long before you would need it for the IRS.
BONUS Tip: Here’s a little-known rule: under the tax rules, you don’t (and shouldn’t) include the December 31 rent payment on the Form 1099 you give the landlord. This comes as a surprise to many, but putting the December 31 payment on the 1099 to the landlord would be incorrect reporting.
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