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
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.
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:
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.
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.