Prepaid expenses
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Prepaid expenses
A prepaid expense is an expense you paid for ahead of time. Under the accrual method of accounting, claim the expense you prepay in the year or years in which you get the related benefit.
Example
Suppose your fiscal year end is December 31, 2023. On June 30, 2023, you prepay the rent on your building for a full year (July 1, 2023, to June 30, 2024). You can only deduct one-half of this rent as an expense in 2023. You can deduct the other half as an expense in 2024.
Under the cash method of accounting, you cannot deduct a prepaid expense amount (other than for inventory) relating to a tax year that is two or more years after the year the expense is paid. However, you can deduct the part of an amount you paid in a previous year for benefits received in the current tax year. These amounts are deductible as long as you have not previously deducted them.
Example
If you paid $600 for a three‑year service contract for office equipment in 2023, you can deduct $400 in 2023. This represents the part of the expense that applies to 2023 and 2024. On your 2025 income tax return, you could then deduct the balance of $200 for the part of the prepaid lease that applies to 2025.
Forms and publications
- Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
- Form T2042, Statement of Farming Activities
- Form T2121, Statement of Fishing Activities
- Form T2125, Statement of Business or Professional Activities
- Interpretation Bulletin IT-417, Prepaid Expenses and Deferred Charges
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- Date modified:
- 2024-08-07