01. International Tax

We provide tailored solutions to complex global businesses doing business in the U.S. Small or multinational, we guide clients through the maze of complex U.S. international tax rules.

02. Offshore Tax Compliance

We assist clients with specialized counsel to fix noncompliance with international tax reporting and penalties. FBAR, forms 8938, 8621, 3520, 926, 5471 and 5472 are among the most common forms that we solve through compliance programs such as streamlined procedures, Voluntary Disclosure Program or the Delinquent International Information Return Submission Procedures (DIIR).

03. Small Business Tax Planning

We assist small and medium businesses with efficient tax structuring to improve efficiencies. Proper tax election, s-corp elections and partnership planning are some of the main solutions offered.

04. Controversy Tax

We guide and represent clients before the IRS including examinations and appeals, as well as represent clients in Tax Court or Federal Courts.

05. Tax Debt Resolution

We help clients to face harsh collection activities, including liens, levies and obtaining a collection alternative such as an offer in compromise, installment payment plans, among others.

06. IRS Criminal Investigations

Our Firm provides representation before IRS Criminal Investigation Division, including Malta Pension Plans and summons.

07. High Net Worth & Family Offices

Assistance with estate planning for select clients and those with cross-border operations, planning for inheritance taxes, and gift taxes in the USA.

08. Start-Ups & Business Tax

No matter how small the idea, we assist clients with the best tax planning and alternatives for their business.

09. Crypto Tax

Our Firm provides tax planning and tax advice on crypto assets and crypto events, including mining, forks, rewards, and disposition/exchange of crypto.

10. BOI Report- Corporate Transparency Act

We assist business owners, CPA and tax preparation firms to file the Beneficial Ownership Information (BOI) report with the FinCEN.

Tax Year-End Planning Strategies: Prepayment of Expenses

Small Business Tax Planning

08.20.2025

As the year-end approaches, taxpayers and professionals should focus on strategies to optimize their tax position for 2024. Among the most effective tools available is the prepayment of expenses. This strategy enables taxpayers to accelerate deductions, reduce taxable income, and manage cash flow efficiently. This article delves into how prepaying expenses works, the IRS “safe harbor” rules, and the tax benefits it offers.

 

Prepayment of Expenses: Accelerating Deductions

 For cash-basis taxpayers, prepaying certain expenses can provide immediate tax benefits by shifting deductions into the current year. This approach is particularly advantageous when income is expected to be high in the current year or lower in the following year.

 

Tax Benefits:

    • Immediate Deduction: Eligible expenses prepaid in the current year are deductible, reducing taxable income and deferring tax obligations.
    • Cash Flow Optimization: Lower taxable income in the current year can free up funds for other business or personal needs.
    • Phase-Out Protection: Reducing adjusted gross income (AGI) may help taxpayers avoid phase-outs for tax credits, deductions, or exemptions.

Examples of Prepaid Expenses:

    • Rent: Prepaying office or equipment leases for the upcoming months.
    • Insurance: Paying premiums for policies that cover the next 12 months.
    • Subscriptions: Prepaying annual fees for professional licenses, software, or memberships.

 

While the prepayment of expenses offers significant tax benefits, it is essential to ensure these deductions comply with IRS rules. This is where the “safe harbor” rule comes into play. The safe harbor provides clear guidelines for taxpayers, enabling them to claim deductions for prepaid expenses confidently, without risking disallowance. Understanding how the safe harbor works can help taxpayers maximize deductions while maintaining compliance.

 

The “Safe Harbor” Rule for Prepaid Expenses

 The IRS provides a “safe harbor” rule that allows taxpayers to deduct certain prepaid expenses in the year of payment, provided they meet specific criteria. This rule ensures compliance while enabling taxpayers to maximize deductions.

How the Safe Harbor Rule Works

    • The 12-Month Rule: The prepaid benefit must not extend beyond:
      • 12 months after the taxpayer first realizes the benefit, or
      • The end of the taxable year following the year the payment was made.
    • Ordinary and Necessary Expenses: The expenses must be ordinary and necessary for the taxpayer’s business or personal needs.
    • Examples of Safe Harbor Application:
      • Rent Prepayments: A small business pays for the first three months of the next year’s office lease in December. Because the benefit period is within the 12-month window, the prepayment qualifies for a current-year deduction.
      • Insurance Premiums: A taxpayer prepays an annual insurance policy for the following year. As the policy term fits within the 12-month rule, the premium is deductible in the year it is paid.

 Relevance for Taxpayers and Tax Professionals

For taxpayers, the prepayment of expenses offers a powerful method to reduce taxable income while maintaining compliance with IRS guidelines. For tax professionals, understanding and applying this strategy provides significant value to clients, allowing them to achieve tax savings and improve their financial position.