Business Expense Timing

Cash vs. accrual — what you can actually control

Cash-basis businesses recognize income when received and expenses when paid. Accrual businesses recognize them when earned/incurred. The strategy below assumes cash basis unless noted.

When you want to lower this year's income

• Delay December invoicing into early January
• Prepay rent, insurance, subscriptions, and dues (12-month rule applies)
• Pay outstanding vendor bills before 12/31 — even by credit card (deduction in the year charged)
• Buy and place in service equipment for Section 179 / bonus depreciation
• Process year-end bonuses to employees (deductible when paid; payroll taxes too)
• Fund employer retirement contributions

When you want to raise this year's income (lower future rates)

• Invoice and collect early (push receivables to land before year-end)
• Push deductible purchases into January
• Skip prepayments and let bills hit next year
• Defer Section 179 elections (depreciate normally over the asset's life instead)
• Consider a Roth conversion to fill up a lower bracket this year

Watch-outs

• Constructive receipt: if a check is available to you in December, it's December income even if you don't cash it
• 12-month rule: prepaid expenses are deductible only if the benefit doesn't extend beyond 12 months or the end of the next tax year
• Sham transactions: 'paid' it in December but the vendor refunds in January — IRS sees through it
• Accrual-basis taxpayers can't simply pay early or invoice late to shift income