How do I deduct prepaid expenses that cover more than one tax year?

[gwesleycone1]

These are all related to our website - domain registration, web hosting, etc. Some were paid before our business began as startup costs and the registration continues - business began 4/2020, payments were made in 10/2018 (3 year domain registration) and 10/2019 (1 year web hosting). We are using accrual method of accounting if that makes a difference. Do I deduct the whole cost in 2020 under startup? Or do I split it to account for the months that were startup and the months that are 2020 (and in the case of the domain registration, save some of the cost for 2021)?

[DaveF1006]

It depends. You can either elect to expense these expenses as startup costs or report these expenses in a more conventional way. We will address both.

According to this IRS link, "Start-up costs include any amounts paid or incurred in connection with creating an active trade or business." If you choose this election, you can deduct up to $5,000 of organizational costs as long as these expenses do not exceed $50,000. Any amount over $50,000 will reduce the $5,000 deduction. All remaining costs will be amortized over a 15-year period. 

There is another way you can claim your expenses. If you are using the accrual method of accounting, the IRS states that the expenses can be deducted under the following circumstances. Please review this IRS publication for more details. Here is a recap of the publication regarding deduction of expenses under the accrual method. 

1. The all-events test has been met. The test is met when:

    a. All events have occurred that fix the fact of liability, and

    b. The liability can be determined with reasonable accuracy.

2. Economic performance has occurred.

In your case, both the all-events test and economic performance happened in 2020 so these are reported in 2020. .As far as reporting these, you would report the website host fee as a normal business expense for 2020.The website domain is a little more complicated.

Domain names are generally regarded as intangible personal property that must be amortized over a 15 year period. You would begin the period in 2020 going forward 15 years. These are the steps that you will use to report this in Turbo Tax.

1. When you begin entering your expenses, check the asset box and all other expenses applicable to your business.
2. Then press start next to asset. Next screen will ask, Any Large Purchases (Depreciable Assets)? Answer yes
3. Next question asks Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2020? Here you will say no because this does not pertain to intangible personal assets.
4. Answer the next question and then on the following question, you will make the selection that this is a Intangible-other property.
5. Next screen tell us a little more, select Amortizable intangibles. 
6. After that, answer all of the questions that pertain to your Domain Name Registration.