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How to Use the 12-Month Rule to Reduce Your Taxable Income

Did you know that there is a special way to deduct business expenses that can save you money on taxes? It's called the 12-month rule.

To use the 12-month rule, you can prepay certain business expenses and deduct them in the year you pay them, even if the expenses benefit you for more than one year.

Here are some examples of business expenses that you can prepay:

  • Utilities (heat, water, sewer, electricity, gas)

  • Internet (cable, fiber, phone)

  • Cell phone usage

  • Rent (if related party only deduct if related party includes in income)

  • Accounting and legal fees

  • Office supplies

  • Advertising

  • Dues and licenses

  • Continuing education

  • Equipment leases

  • Insurance (but limits apply)

  • Important note: You cannot prepay interest or loan payments under the 12-month rule.

The 12-month rule can be a great way to save money on taxes, especially if you have a fluctuating income. For example, if you think you will have a good year next year, you can prepay certain expenses this year and deduct them immediately. This can help to reduce your taxable income and save you money on your taxes.

When deciding which expenses to prepay, be sure to consider your cash flow needs. You don't want to prepay expenses that you can't afford to pay right now.

If you're interested in using the 12-month rule and have any questions, don't hesitate to reach out. We can help you determine which expenses qualify and how to properly deduct them on your tax return.

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