Question

Is it correct to deduct $4,800 for rent under the 12-month rule for capitalizing expenditures, considering that the rule applies to rent (but not interest) payments for a cash method taxpayer? Additionally, how does the treatment differ for an accrual method taxpayer concerning the deduction of both rent and interest over the period relating to the lease or loan term due to economic performance?

Answer 1

Cash method taxpayers can deduct prepaid rent expenses for a period under the 12-month rule, while accrual method taxpayers deduct rent and interest expenses over the period related to the lease or loan term as they incur due to economic performance.

Step-by-step explanation:

Yes, it is correct to deduct $4,800 for rent under the 12-month rule for capitalizing expenditures as long as the prepayment applies to a period that does not extend beyond the earlier of 12 months after the first date on which the taxpayer realizes the rights or benefit, or the end of the tax year after the tax year in which the payment was made.

This rule applies specifically to rent payments for cash method taxpayers, who are allowed to deduct their expenses in the year in which they are actually paid. For an accrual method taxpayer, rent and interest expenses are typically deducted over the period to which they relate due to the concept of economic performance. The economic performance occurs as the taxpayer uses the rented property over time or as the interest accrues, respectively.