I purchased a website subscription in 2021 but it is renewed till 2023. I am cash method accounting sch c file. Can I take the entire amount in 2021?

[confusedabouttaxes23]

I read something about 12 month rule? Can I take entire expense in 2021 or do I prorate till 2023? I am cash method sch c filer.

[PattiF]

Yes, you can take the entire amount as a 2021 expense. As a cash-based business, you can use the expense when paid.

[confusedabouttaxes23]

I read something about a 12 month rule saying the benefits can't extend beyond 12 months or next tax year. So I have to prorate it for 2021,2022, and 2023 right?

[ColeenD3]

No. As @PattiF said, you paid it in 2021. It is a 2021 expense.

[confusedabouttaxes23]

@ColeenD3 

So no I cannot deduct the whole thing in 2021? Confused with the responses I got. I found this link in community https://ttlc.intuit.com/community/business-taxes/discussion/where-should-i-claim-software-subscripti... 

I found others also. So I cannot deduct the entire cost of website subscription in 2021 because it goes till 2023?

[ColeenD3]

Yes, you are right. In general, you can't deduct prepaid expenses, but there are certain circumstances you can. From Nolo:

You may use the 12-month rule for business insurance premiums, business licenses, rents and leases, and payments to terminate business contracts. However, you may not use it for payments for interest, loans, and other financial interests, or purchases of furniture, equipment, and other long-term capital asset.

From Pub 538

Income 

Under the cash method, you include in your gross income all items of income you actually or constructively received during the tax year. If you received property and services, you must include their fair market value (FMV) in income.

Expenses 

Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. This includes business expenses for which you contest liability. However, you may not be able to deduct an expense paid in advance. Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules.

.

[confusedabouttaxes23]

@ColeenD3 

So I got the website renewal in 2021 and it expires in 2023. Goes past 12 month. I am cash method sole prop. So are you saying I can deduct the whole receipt in 2021 and don't need to prorate it till 2023? So no need to prorate? I never applied for anything speci with irs it said something about form 3115. Thank you for helping!

[ColeenD3]

Since it extends beyond the 12 months, it does not qualify for the 12-month rule. deduct it all in 2021.

[Carl]

What you paid for a 2 year subscription is fully deductible in the tax year you paid it. Now if you paid for 3 or more years, then you are right. But in this case we're not talking about something material. It's a subscription. Not a product. Not a service.

[confusedabouttaxes23]

So I found pub 538 that says 12 month rule. Does that mean if the subscription goes over 12 months it has to be prorated?

[LeonardS]

No, you will deduct the entire amount of the subscription in 2021

[confusedabouttaxes23]

But according to irs Irs website I have to prorate it. Can you tell me why I don't? Just trying to get better understanding 

[AliciaP1]

Publication 538 states that if you did not start your business using the 12-month rule then you cannot change your Accounting Method without IRS approval.  I know you have operated at least in 2020 as well, from your other post I helped you on.  So, even if you did not have any multi-year expenses before, you have already reported you are reporting on the Cash Method (plus you started this thread with that information).  Electing the 12-month rule makes you an Accrual Method business and requires IRS approval for the change in method.

You do not want that hassle!  So, the proper treatment of your website renewal, is to report the cash you paid in full in 2021.

@confusedabouttaxes23

[AmeliesUncle]

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@confusedabouttaxes23 wrote:

So I found pub 538 that says 12 month rule. Does that mean if the subscription goes over 12 months it has to be prorated?

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All of these so-called "tax experts" have no idea what they are talking about.  They really should NOT be answering questions that they don't know.

As you pointed out, your expense covers more than 12 months.  That means you need to prorate the amount, and only deduct the portion that applies to 2021.

[confusedabouttaxes23]

@AmeliesUncle 

Do I have to file form 3115 too because I don't want to change my accounting method from cash. Can I just prorate this? All my other expenses for email packages etc are 1 year from date of purchase. This was a 2 year deal. So they all fit the 12 month rule as their terms are one year