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 2023 prepayments cannot go into 2025. 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 lease payments on business vehicles, rent payments on offices and machinery, and insurance premiums.
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 29, 2023, you mail a rent check for $36,000 to cover all of your 2024 rent. Your landlord does not receive the payment in the mail until Tuesday, January 2, 2024. Here are the results:
You deduct $36,000 this year (2023—the year you paid the money).
The landlord reports $36,000 as rental income in 2024 (the year he received the money).
You accomplish the goal, which is to obtain the deduction this year. The landlord gets next year’s entire rent in advance, eliminating any collection problems while keeping the income taxable in the year he expects it to be taxable.
2. Stop Billing Customers, Clients, and Patients
Here is one rock-solid, straightforward strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2023. (I assume here that you or your corporation is on a cash basis and operates on the calendar year.)
Customers, clients, and insurance companies generally don’t pay until billed. Not billing customers and clients is a time-tested tax-planning strategy that business owners have used successfully for years.
For example. Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. Taking these steps allowed him to postpone paying taxes on his December 2023 income by moving that income to 2024.