Joe,a cash basis taxpayer,took out a 12-month business loan on December 1,2016.He prepaid all $3,600 of the interest on the loan on December 1,2016.Joe can deduct only $300 of the prepaid interest in 2016.

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According to the cash basis method, expenses are deductible in the year they are paid. Since Joe prepaid the interest on December 1,2016, he can only deduct $300 (1/12th of the total prepaid interest) in 2016, and the remaining $3,300 can be deducted in 2017, assuming he continues to use the cash basis method.

Joe,a Cash Basis Taxpayer,took Out a 12-Month Business Loan on December