1. Prepay Expenses Using the IRS Safe Harbor
You just have to give thanks to the IRS for its tax-deduction safe harbors.
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2018 prepayments cannot go into 2020. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include, among others, lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Monday, December 31, 2018, you mail a rent check for $36,000 to cover all of your 2019 rent. Your landlord does not receive the payment in the mail until Wednesday, January 2, 2019. Here are the results:
You deduct $36,000 in 2018 (the year you paid the money).
The landlord reports $36,000 in 2019 (the year he received the money).
You get what you want—the deduction this year.
The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2018, he would have had to pay taxes on the rent money in 2018.
Before sending a big rent check to your landlord, make sure the landlord understands the strategy. Otherwise, he might not deposit the rent check (thinking your payment was a mistake) and, instead, return the check to you. This could put a crimp in the strategy because you operate on a cash basis.
Also, think proof. Remember, the burden of proof is on you. How do you prove that you mailed the check by December 31? Think like an IRS auditor or, better yet, a prosecuting attorney.
Answer: Send the check using one of the postal services tracking delivery methods, such as priority mail with tracking and possibly signature required, or by one of the old standards, which were certified or registered mail.
With these types of mailings, you have proof of the date that you mailed the rent check. You also have proof of the day the landlord received the check.
If you are using USPS online tracking, make sure to print the delivery and receipt tracking results for your tax records, because that tracking information disappears from the postal service records long before you would need it for the IRS.