Prepaying Expenses – Deducting Your Rent

As the year winds down and comes to a close, you might be thinking there isn’t much left you can accomplish with your tax deductions. Well, that’s simply not true. I am going to give you some easy and effective ways you can take advantage of the end of the year.

This is especially helpful if you happen to get a nice “end of the year” bonus check, or close a big deal that has a decent amount of income that hits your account in the last quarter of the year.

First a little “Nerd language”.

There are certain deductions that come in the form of something called Prepaid Expenses. This allows cash based tax payers (which is the majority of taxpayers) to deduct certain qualifying expenses up to 12-months in advance.

That’s right, 12 MONTHS in advance.

So, what is something you can pay off a year in advance? You guessed it, rent.

And by following these BollitProof steps below, you can deduct the entire amount of what you prepay off this years taxes!

Have a Chat with your Landlord

You MUST begin by having a conversation with your landlord ahead of time to make sure they are comfortable with this. Heck, show them this article so they can understand it is from a top tax advisor.

Ok so first, let’s look at timing.

In this example, let’s imagine you want to prepay your full rent for next year. If you prepay your rent on Dec. 31 of this year, your landlord, under normal circumstances, would have to count the income for this year. This is something they may not be prepared for themselves.

Now, there is NOTHING wrong with prepaying your rent or what I’m telling you to do from a tax perspective, it is just as a courtesy to your landlord so make sure they are ok with this. And you want your landlord to like you, right? If they are ok with counting your prepayment toward this year on their own taxes, great your done.

But what if your landlord doesn’t want to receive the prepaid rent (and cash it) until 2020. Meaning what if they don’t want to have all of that money count toward this years taxes for themselves?

Well, if they simply deposit or cash it in 2020 then Voila! They don’t have to pay taxes on that amount until they file their 2020 tax return.

Here’s how simple this it

To keep things easy, let’s say every month you owe $2,000 in rent. That’s a $24,000 deduction you could make THIS YEAR by following these steps.

Step 1: Start by writing a check for the full amount and dating it
Step 2: Mail a certified copy of your check to your landlord by December 31st.

That’s it!

Something quite unique about this strategy – there is not a “matching principle” in terms of actual tax years.

What this means is if you owe rent and decide to pay on Dec. 31, 2019 and your landlord cashes it on January 2, 2020, you still get the deduction in 2019 but your landlord will not actually get the income until 2020. It’s a win-win!

Now, you may be thinking, isn’t this just putting off the inevitable of paying those taxes since I wouldn’t have a rent expense in 2020?

Yes you’re absolutely right. But keep in mind, with the BollitProof program you get to learn new innovative strategies, this is 12 months of tax strategies that will assist you along the way. So, even though you’re tecniqually “kicking the can” to the next year, in the long run this will be beneficial for you.

Other things to prepay

Now that we’ve talked about rent, let’s take a look at some other types of common prepaid expenses.

  • Insurance (this can be car insurance, business insurance, etc)
  • Home office deduction, meaning if you work from home your office supplies can be deducted.
  • Lease payment (car, equipment)
  • Business equipment and supplies

Let’s just get this out in the open since your mind is probably racing… yes, now is your time to go shopping. That’s right, I am encouraging you to go crazy on Amazon! The end of the year is the perfect time to make bigger purchases.

Buying equipment falls under tax code section 179 (If you don’t know much about tax code section 179 – we will link our article all about it here). This allows us to fully deduct cars over 6,000 lbs, machinery, equipment, computers, desk furniture and vehicles.

With that being said, now might be the time to purchase that new sofa you’ve been eyeing or the new laptop you need. Any purchases going toward a home office and/or your businesses should happen before we reach the end of the year.

My advice?

If you are in a position where you can prepay any qualified expenses, seize the day! Make smart purchases for before the year ends. Do NOT procrastinate!