There has long been uncertainty as to the appropriate treatment by an accrual method taxpayer of an ordinary and necessary business expense producing a benefit that extends into the following tax year: for example, an annual premium for insurance coverage over a 12-month period straddling two taxable years. Can such an expense be deducted in the year it was made, or must it be capitalized and then written off over the term of the resulting asset (e.g., the insurance policy)?
Cash method taxpayers have generally been permitted a full deduction for insurance premiums and other ordinary and recurring expenditures in the year of payment where the payment results in a benefit for one year or less. It has been unclear, however, whether such a one-year rule applies to accrual method taxpayers as well.
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