I would really like to reduce the taxable income from my business for this year but I would rather delay the payments for expenses until January. Can I deduct the expenses this year even if I don't pay them in the current year? Yes, you may be able to do just that. There are a couple of scenarios where this could be possible.
According to general accounting principles your expenses should be reflected on your books in the time period that you receive value for them. So it is a matching principle. However, there are some provisions that allow you to deduct expenditures that you will receive value from in the future.
Accrual Based Taxpayer - Accruing the ExpenseIf your business uses the accrual basis for tax purposes you may be able to enter a bill for an expense in the current year and pay for it next year. From my research it looks like you can do this with bills that you will pay off and receive the benefit from the expense within the next eight and a half months. This is a generalization and there is really more to it, but I mention this because it is a possibility.
Accrual Based Taxpayer - Allowance If You Actually Pay For the ExpenseWe considered how we deduct something this year that we won't pay for until after the year end. Another issue is actually paying for something and being able to deduct it this year even though it is for next year. In this case, if you have paid for it, there is a provision that you can deduct the expense as long the receipt of the value of the services does not extend beyond twelve months or the end of the next tax year.
Using a Credit Card - Cash or Accrual Based TaxpayersEven if you are a cash basis taxpayer there is a way to take a deduction that you have not yet paid cash, or a digital equivalent, for yet. This can be done by using a credit card. Understand that using a credit card to pay for something is like borrowing money and using that money to pay for it. Using a credit card does not affect your cash balances just as borrowing and using that money to purchase something also does not affect your cash balance when it is all completed. However, in both cases, while you don't reduce cash balances as a result this year you will eventually and maybe incur some interest expense also. So if your business purchases something using a credit card that is a deductible expense you can take that expense even though you have not paid cash to pay off the credit card bill yet. By doing this you can take expenses without reducing your cash balances this year.
But is it of value to the business this year? In general you can only take the expense when your business receives the value for it. For items you use in your day to day business you can deduct them just the same as if you paid cash for them. The question really comes up when paying for things like insurance that are providing value for your business for next year. So since using a credit card to pay for it is no different that paying cash for it, as long as the benefit of the expenditure does not extend beyond the next twelve months or the end of the next tax year you are able to take the deduction this year.
CautionsThere are a couple of things you need to be cautious about when using the strategies mentioned above. First with the use of credit cards, as in the use of a checking account or digital account, make sure you don't commingle your business and personal expenditures. That means using separate accounts for business purchases, separate from your personal accounts. Commingling your personal and business accounts is messy and it could cause an IRS auditor to expand the scope of an audit for your business to include your personal and when they have a doubt they may deny expenses because of the commingling of funds.
The other caution is the use of credit cards can cause additional expenses if not paid in time or if not paid off entirely. You need to be really disciplined to control this issue.
The other concept to grasp is this strategy is in affect just moving your expenses up from next year to this year. That means that you get to reduce income this year but to go along with that eventually this will mean more income next year. You may delay it again another year by doing the same thing at the end of next year but eventually you will have a year where you have to reduce your cash balances for something you previously deducted and you won't get the tax benefit of that deduction because you took it in a previous year. So this strategy delays income and can be beneficial if you expect less income in a coming year. If not eventually you things even out and the delay will get caught up.
With the new TCJA tax law, you may want to consider just letting the expense go into next year. The TCJA provides for a new 20% of qualified income from qualified businesses. For more information about this provision see these other articles I have written:
Qualified Business Income Deduction
Qualified Business Income Deduction - Different Entity Types - Which One is Best For You
Year End Help
I have regular year end conversations about this topic with many of my clients starting toward the end of their third quarter. Yes I prefer to talk to my clients throughout the year, and not just at tax time. While I charge more for tax planning, it enables me also to provide more value for you rather than merely preparing tax returns. This would enable you to get real value that affects your bottom line. So if you want a CPA that gives you more than tax returns then email me using my contact information below to setup an appointment to discuss your situation.
The CPA Superhero
Tax Geek Tuesday: When Can a Business Deduct Prepaid Expenses - Forbes
How Do I Time Income and Expenses At The End of The Tax Year - The Balance
Tax Geek Tuesday Demystifying The Deduction Rules for Accrued Liabilities - Forbes
Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.