Do I write off expenses incurred this year eventhough I won't be paid until next year?

[curran-tho]

I work as an independent contractor/ consultant and I will be spending 4 months abroad in 2018 and will be earning income that I will need to claim in the US for my 2018 taxes.  I already incurred expenses this year (2017) in preparation for the trip including the first month and half of my lodging expenses, which had to be paid in advance. Do I write those expenses that I incurred in 2017 off for my 2017 taxes eventhough I won't receive payment until 2018?  thank you! 

[Carl]

Assuming you've set up your business to use the cash accounting method, expenses are reported in the tax year they are paid. Period. Income is reported in the tax year it is received. Period. It does not matter what year the expenses or income may be *for*.

[Opus 17]

Not if this is the first year in business.

[Carl]

Where you finding that? Not confusing with startup expenses?

[Opus 17]

If this is his first year, why aren't they start up expenses?  If the taxpayer has no income to deduct against because this is year one, that's what they are.  Otherwise they are lost forever which I don't think is correct.

[Carl]

No, they're not lost forever. They're amortized over the first 15 years of the business. But one has to read the rules in pub 535. There are some expenses that if incurred, one can not claim or amortize.

[Opus 17]

If you are currently an independent contractor**, then you deduct your expenses when you actually pay them and your income when you actually receive it.  

If this is your first time as self-employed, then since you have no income to deduct your expenses against, this is what you do:

You can deduct up to $5000 of "start up costs" as an expense in the first year that you actually have income.  If you have more than $5000 of start up costs, part can be deducted in year one and the rest must be amortized (spread out) over 15 years, based on a particular formula as described here, https://www.irs.gov/publications/p535

**And a cash basis taxpayer.  Everyone is a cash basis taxpayer unless you aren't, but setting up the other method requires an accountant and you would already know if you had done it.

[Carl]

I can see this potentially confusing some readers later down the line. So to clarify, startup expenses are those expenses incurred before the business is officially "open for business". For startup expenses, it does not matter in what year they are incurred. I've seen and heard of cases where it took years to get the business to the point of being "open". In such cases, one can have 2-3 years (or more) of startup expenses. IN such a case, make absolutely certain you keep all receipts and document everything. Sometimes, just having a receipt is not enough. You must be able to prove the expense was necessary *and* was incurred with the specific intent of starting a business.

[Opus 17]

Qualifying costs. A start-up cost is amortizable if it meets both of the following tests.
•It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into).
•It is a cost you pay or incur before the day your active trade or business begins.

Start-up costs include amounts paid for the following.

•An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
•Advertisements for the opening of the business.
•Salaries and wages for employees who are being trained and their instructors.
•Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
•Salaries and fees for executives and consultants, or for similar professional services.


Nonqualifying costs. Start-up costs do not include deductible interest, taxes, or research and experimental costs. See Research and Experimental Costs , later.

[Hal_Al]

The simple answer is Yes. You deduct your expenses when incurred, regardless of whether you have income that year. 

Whether you deduction will hold up under audit, will depend on many factors; the nature of the expense, whether the next year income was actually realized, the nature of the consulting activity, etc