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If I paid my business expenses with a credit card during the month of December, which year can I deduct them from my taxes? 2011 (when the purchase was made) or 2012 (when I paid off the credit card)?

IRS pub reference greatly appreciated

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Is this for your personal income tax return, or for the business? – JohnFx Dec 31 '11 at 4:15
Cash, I think that's the only way for a sole propriator – littleadv Dec 31 '11 at 4:39
And its for my schedule C – littleadv Dec 31 '11 at 4:40
Natwar Lath - you are incorrect. With respect to GAAP, that is right. But the question being asked is with respect to TAX return, for a cash basis TAXPAYER. IT IS solely based on when it is PAID. Not accrual accounting / principles of accounting. Your comment: "For example, we may buy on credit does not mean that they will be allowed in the period in which it is paid. This is against the fundamental accounting principles" For GAAP = correct For Tax (cash basis) = incorrect – user17758 Jun 28 '14 at 21:31

According to this discussion, there was a Tax Court ruling that likened deductibility for charitable giving by credit card to business expenses incurred by businesses operating under cash-basis accounting. (The point is made by Larry Hess on that site.)

Short answer: According to this argument, you can claim the deduction when the charge is incurred. You don't have to wait until you pay it back. (Again this is for cash basis.)

Publication 538 states that "under the cash method of accounting, you generally deduct business expenses in the tax year you pay them." I think the ruling above was meant to clarify when the expense is "paid". In my totally unofficial opinion, I suppose this makes sense. If I go to Office Depot to buy a box of envelopes, I walk out with the envelopes at the same time regardless of whether I paid cash or swiped a credit card. I wouldn't walk out thinking: "HA! I haven't actually paid for these yet." If the shoplifting alarm went off at the door and I was asked if I had bought those, I'd say yes, right?

If this doesn't convince you, you can always get professional tax advice.

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My CPA said the same thing. – littleadv Mar 8 '12 at 19:09

I'm assuming you're operating on the cash basis of accounting, based on your comment "Cash, I think that's the only way for a sole propriator (sic)"

Consider: There are two distinct but similar-name concepts here: "paid for" (in relation to a expense) and "paid off" (in relation to a debt). These both occur in the case you describe:

  • First, you pay for the expense, using credit.
  • Then, you pay off the debt incurred.

Under the cash basis of accounting, when you can deduct an expense is based on when you paid for the expense, not when you eventually pay off any resulting debt arising from paying for the expense.

Admittedly, "cash basis" isn't a great name because things don't solely revolve around cash. Rather, it's when money has changed hands – whether in the form of cash, check, credit card, etc. Perhaps "monetary transaction basis" might have been a better name since it would capture the paid-for concept whether using cash or credit. Unfortunately, we're stuck with the terminology the industry established.

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Assuming that it's not inventory that is sold in the following year or a depreciable asset, you can deduct it when you make the purchase. The courts have ruled that credit cards balances are considered debt. It's treated the same way as if you went to the bank, got a loan, and used cash or a check to purchase the items. On your accounting books, you would debit the expense account and credit the credit card liability account. This is only for credit cards, which are considered loans. If you use a store charge card, then you cannot deduct it until you pay. Those are considered accounts payable.

I'm an IRS agent and a CPA.

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Being a professional auditor and accountant, deduction against expenses are claimed in the year in which expenses has been incurred. It has no relationship with when it is paid. For example, we may buy on credit does not mean that they will be allowed in the period in which it is paid. This is against the fundamental accounting principles.

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But its not reflected in my bank account balance at the end of the year. Is it still OK? – littleadv Dec 31 '11 at 20:46
This answer alludes to accrual accounting and the matching principle. It isn't applicable to cash basis accounting. – Chris W. Rea Jan 2 '12 at 3:13

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