Question

On Dec. 15, 2018, Julie’s Tax Prep, a cash-method taxpayer, prepaid $3,000 worth of deductible interest on a business loan. The interest won’t accrue until January 2019. Julie’s Tax Prep will be displaying for the first time at a trade show in July 2019. On Dec. 16, 2018, Julie’s prepaid the $6,000 trade show booth rental expense. The payment isn’t due until May 2019, and use of the booth will occur in July 2019. In addition, On Dec. 28, 2018, Ed’s Equipment repaired some equipment in Julie’s office and billed Julie’s $5,000. Julie’s received the invoice on Dec. 28, 2018 and paid the $5,000 invoice on Jan. 29, 2019. How much of the $14,000 in deductible business expenses may Julie’s Tax Prep deduct in 2018?

Answer 1

For a cash method taxpayer the rules are:
1) Income is recognized when it is received
2) Expenses are recognized when these are paid.
Exception to the rule for prepaid expenses is 12 month rule is applied
in which two conditions need to be fulfilled 1) If the benefit is for less than 12 months 2) Benefits extent upto next year not beyond it
Hence Prepaid interest which will be accure after Jan 2019 but within one year hence deductible
Prepaid rent worth $6000 also allowed as it will be expenses wihtin one year in July 2019
Repairs expenses paid next year will not be recognized this year
Hence total deductible business expenses are:
$3000+6000	$9,000
If any doubt please comment