After re-reading the posts again, especially pharmland's; you're right. Since cash is being credited either way, an expense account is realized at that moment. Sorry.
Good thread though.
Good thread though.
Tax Writeoff Tip?
- Thread starter klaxx
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Some good points, though I'm just having a difficult time seeing how accrual will work in this case. He wants to just load 20k into his account and try and write that off for this year. Since accrual recognizes an expense before it is paid, where is the expense? Would prepaid advertising be recognized as an expense?
As far as I know, (correct me if I'm wrong), it wouldn't. There is no expense being incurred therefore, you aren't able to just DR Expenses and CR Accounts Payable. Once he starts having some charges rolling in then he could definitely use the accrual method.
And it doesn't look like he can go the deferral method route because expenses are incurring after being paid, so they won't be recognized until they actually happen.
Won't be deductible until you actually incur the adword charges (which in this case would appear to be in 2009). You cannot deduct a business expense until "economic performance" occurs. Doesn't matter if you are on a cash basis or an accrual basis. Making such a deposit would create an asset (an asset which strangely enough is referred to as a "prepaid expense").
Let me know if you have any additional questions
Good points, the reason is because I'm around that amount away to be on a lower tax bracket this year.
I got out my financial accounting book to maybe help... I hope. It says verbatim: " A prepaid expense is an asset account that identifies a resource that has been paid for but not used. The purchase is an asset because a resource has been acquired that will be used in the future. The January transaction records use of the resource. The expense should be recognized in January, when the resource is consumed, rather than in December when cash is paid. The expense has been deferred from the time of the payment to January, when the advertising is used. (I changed the months to make it relevent to this discussion.)
The accounting equation gives us:
Dec 31st: Prepaid advertising under assets +20,000
Cash -20,0000
January 1st: Advertising expense (under retained earnings in the owners equity) -20,000
Prepaid advertising (under assets) -20,000
Resource: Financial Accounting Information for Decisions (Ingram, Albright) 6th ed.
After typing, Im thinking maybe I shouldnt have posted. ehh
The accounting equation gives us:
Dec 31st: Prepaid advertising under assets +20,000
Cash -20,0000
January 1st: Advertising expense (under retained earnings in the owners equity) -20,000
Prepaid advertising (under assets) -20,000
Resource: Financial Accounting Information for Decisions (Ingram, Albright) 6th ed.
After typing, Im thinking maybe I shouldnt have posted. ehh
Ask a CPA and you'll get the same answer I gave you. This isn't one of the "gray" areas of the tax code. Save your money and spend it on booze at ASW. PM me if you want my credentials.
Sorry but no. The rule of thumb appears to be that you can prepay as long as the benefit does not last beyond 12 months. Here is a quote from here:
THE ONE-YEAR RULE
The tax treatment of prepaid expenses generally follows the “one-year rule.” It states that, as a cash-basis contractor, you can usually deduct prepayments for materials and supplies as long as the period to which the payments apply is one year or less. Also, you must be able to show:
- The expenditure is an actual payment — not a refundable deposit,
- The prepayment is for a substantial business purpose and not merely to avoid taxes, and
- The deduction does not materially distort income
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