Posted by JHyre in Ohio on December 25, 2002 at 08:14:11:
Prepayments are a fuzzy area. What seems to happen, as a practical matter: Prepayments that are “reasonable” in amount are often allowed, but once you go beyond a few months, an auditor would likely defer the deduction until the period to which it properly relates (e.g. - interest due March 2003 would be deductible in March 2003). The IRS has great power in this regard and the courts have usually backed it up to avoid “the distortion of income”. The old saw normally applies: Pigs get fat, hogs get slaughtered.
I would probably pick an item other than “interest” to prepay because a prepayment on a loan normally reduces principal, and so the payment is not really considered interest. Prepaying a month or two of other expenses is unlikely to be a big deal…prepaying a year or more of expenses is unlikely to stand up on audit. Ideally, you could incur expenses that do not relate to a specific time (e.g. - books and office supplies, as opposed to insurance and utilities).