Part 2 Business Income and Deductions question: Applying the 12-month rule of the capitalization regulations

Part 2Business Income and Deductions

On December 1, 2025, a cash-method business paid $12,000 for 12 months of office rent starting that day. Applying the 12-month rule of the capitalization regulations, how much can it deduct for 2025?

A $0
B $1,000
C $6,000
D $12,000

Show the answer and explanation

Answer: D. $12,000

Under the 12-month rule, a cash-method taxpayer may deduct a prepaid expense in the year paid if the benefit does not extend beyond the earlier of 12 months after the benefit begins or the end of the following tax year. Rent for December 2025 through November 2026 qualifies, so the full $12,000 is deductible in 2025. Source: Treas. Reg. 1.263(a)-4(f); Pub. 334 (2025), Prepaid expense. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Prorating prepayments that fit the 12-month rule.

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