TAX MATTERS: The income tax position of prepaid expenses

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COMPANIES tend to make prepayments because suppliers may insist on receiving payments before they make a supply. This is often a custom in the insurance industry, where they request for premiums before the insurer covers the insured against a risk.

Also, licences are often paid for in advance before granting right of use to the tenant. Customers may also make prepayments because they want to benefit from discounts and economies of scale. Although prepayments constitute a very popular expenditure for most entities; some taxpayers are not conversant with how the expense is treated for income tax purposes.