Can I prepay a fractional CMO in December and deduct it this year?
How the IRS 12-month rule treats a retainer paid before year end, when a prepayment has to wait for next year's return, and what to put in the agreement.
Often yes, if your business uses the cash method and the prepaid work is short. IRS Publication 538 says an expense paid in advance is generally deductible only in the year it applies to, but the 12-month rule lets you deduct the full payment now when the benefit you paid for ends within 12 months of starting and before the end of next tax year. A December payment for January through March fits easily, and a payment that covers the next 18 months does not.
Publication 538 sets out two limits, and the prepaid service has to stay inside both. The right or benefit you are paying for cannot extend beyond the earlier of 12 months after the right or benefit begins, or the end of the tax year after the year you make the payment. The IRS example uses a business insurance policy. A calendar-year business pays for one year of cover starting July 1 and deducts the whole amount in the year it paid, because the policy ends within 12 months and before the end of the following year. A fractional CMO retainer works the same way as long as the agreement defines the period the payment buys.
Take a calendar-year company on the cash method that pays an outside marketing leader in December 2026. If the payment covers January to March 2027, the service ends well inside both limits, and under the rule the whole payment can be deducted on the 2026 return. If it covers all of 2027, the service runs from January 1 to December 31, 2027. That is 12 months from the start and inside the end of the next tax year, so it still fits. If it covers January 2027 to June 2028, the benefit runs past the end of 2027 and past 12 months, so the rule does not apply and the cost is spread over the years it covers.
The amount you pay is your choice. The dates in the agreement are what the rule looks at, and without a written start and end date it is hard to show that a payment fits. Put the service period on the invoice as well as in the contract.
The examples above assume the cash method. A business on the accrual method also has to meet the timing rules for accrual taxpayers in the same publication, and those can reach a different result. A business with a fiscal year ending in a month other than December applies the two limits to its own tax years.
Prepaying also does not change whether the expense is deductible at all. The rule only decides which year an otherwise deductible business cost lands in. If the fractional CMO is your own employee or an owner of the company, the payroll and ownership rules come first, and the 12-month rule is the smaller question. Ask your tax preparer before you send the payment, since they can see how the deduction interacts with the rest of your return.
A December prepayment is also a decision to keep paying through spring. That is fine when the company is ready for senior marketing leadership, and expensive when what it really needs is someone to produce the work. The four-minute diagnostic on this site scores which situation you are in and names the cheaper option when a fractional CMO is the wrong buy.
This note is general information about a published IRS rule and is no substitute for advice from a tax professional who knows your books.