2.3.2.1. Prepaid Expenses
In general a taxpayer must capitalize prepaid expenses. However, there is an exception to the general rule. A taxpayer using the cash method of accounting is not required to capitalize prepaid amounts that do not extend beyond 12 months after the first date the service or benefit is received or the end of the taxable year following the year in which the payment was made.
Example: In November 2020, a company signs a three-year lease at a rent of $20,000 per year to begin in January. On December 1, it pays $60,000 for the entire three-year period. The $60,000 payment must be amortized over the three-year period of the lease, allowing it to deduct $20,000 in each of the years 2021–2023.