What is a deferred expense?

Deferred expenses are business costs that have already been paid or incurred, but are recognized as expenses over future accounting periods. These costs are spread out over time to match the periods in which the business receives the benefit.

What is a deferred expense?

A deferred expense is any ordinary and necessary business cost that is initially recorded as an asset because its benefit extends beyond the current accounting period. The expense is then gradually recognized over time as the related goods or services are consumed or used. Deferred expenses are common in accrual accounting and are closely related to prepaid expenses.

How to categorize deferred expenses

Record the initial cost as a Deferred Expense (Asset) on the balance sheet.
Amortize or expense the cost systematically over the benefit period.
Recognize the expense under Operating Expenses as it is incurred.
Review deferred expense balances regularly to ensure proper timing and accuracy.
Maintain contracts, invoices, and amortization schedules for documentation.

Examples of deferred expenses

Insurance premiums covering multiple accounting periods.
Prepaid rent or lease payments.
Long-term advertising or marketing campaigns paid upfront.
Software licenses or service contracts with multi-period coverage.
Training or onboarding costs that benefit future periods.
Large maintenance or service agreements.

Tax implications for deferred expenses

Under accrual accounting, deferred expenses are deducted over the period they benefit, not necessarily when paid.
Cash-based businesses may deduct expenses when paid, subject to IRS rules such as the 12-month rule.
Expenses must be ordinary, necessary, and directly related to business operations to be deductible.
Proper deferral prevents overstating expenses in a single period and improves financial accuracy.
Deferred expenses are reported on business tax returns according to the business’s accounting method.