Under what circumstances can prepaid expenses be deducted in the year of payment by a taxpayer using the cash method of accounting? In the case of prepaid rent, a taxpayer may take a current deduction for the entire amount of an expenditure if the period covered by the prepayment exceeds one year and the rent agreement obligates the taxpayer to make the prepayment. Prepaid interest included in the taxpayers monthly mortgage payment may be deducted in the year paid. Under the cash method of accounting the prepayment of expenses will always result in a current deduction. Prepaid interest in the form of points charged in connection with the improvement of a taxpayer's principal residence may be deducted in the year paid if (1) the loan is secured by the residence. (2) the payment of points is an established business practice, and (3) the amount of the prepayment does not exceed the amount generally charged