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Bkfoster

TaxAlmanac

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Deductability of credit card purchases for a cash basis business taxpayer?

( Asked 06/20/06 01:07 AM in TaxAlmanacViews by community 24 )

Answers (17)  Comments (4)  

Michaelstar

TaxAlmanac

Not really sure what the question is? If can the (cash basis) t/p deduct charges charged to a credit card which was not paid off as of 12/31 - the answer is yes. They also have an interest deduction as well when added to the o/s balance by the cc company.

( Answered 06/20/06 01:11 AM in TaxAlmanac ,Views by community 24 )

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Janakpatel

TaxAlmanac

Purcahses by credit cards are considered cash paid. You have a liability to pay credit card compnay, but that is not an issue for cash basis taxpayer.

( Answered 06/22/06 12:34 AM in TaxAlmanac ,Views by community 24 )

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TATruthseeker

TaxAlmanac

Bkfoster

If the credit card is in the business name, no problem. However, if the cards are in the business owner's name and the purchases are business related, take the deduction and save all receipts.

( Answered 06/22/06 01:23 AM in TaxAlmanac ,Views by community 24 )

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Www.cpa1.biz

TaxAlmanac

Almanacers,

So let me clarify this. You are allowed to take the deductions from the credit when you do have an outstanding balance on your books.

Is this because a credit card is considered a cash type payment?

Thanks,

Bj

( Answered 01/20/07 01:55 AM in TaxAlmanac ,Views by community 24 )

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Uncle Sam

TaxAlmanac

I thought though, there IS a distinction between a CREDIT CARD (VISA, Mastercard, American Express) vs. CHARGE CARD, which is issued by a specific vendor (Home Depot, Kohl's) A credit card charge can be deducted in year charged, but a charge card must be deducted in year paid.

( Answered 01/20/07 02:05 AM in TaxAlmanac ,Views by community 24 )

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Lhhesscpa

TaxAlmanac

Charges to any revolving charge account are deductible as of the date of the charge, usually the transaction date on the statement. The charges are considered loans. After all, since a revolving charge account remains in good standing when at least the minimum payment is made timely, there's no way to associate a payment with any specific charge(s). -- Larry Hess, CPA, Albuquerque, NM (http://www.taxalmanac.org/index.php/user:Lhhesscpa) - Talk to me (http://www.taxalmanac.org/index.php/User_talk:Lhhesscpa)

( Answered 01/20/07 02:08 AM in TaxAlmanac ,Views by community 24 )

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Death_Taxes

TaxAlmanac

Dennis, or someone else perhaps more knowledgable, will correct me if I am wrong, but Home Depot can sue and obtain a judgment based on your signature when you have a Home Depot card. If your local hardware store, your dentist or doctor, etc permits you to 'put it on your tab' that is a good illustration of an expense that is not deductible until paid.

( Answered 01/20/07 02:51 PM in TaxAlmanac ,Views by community 24 )

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Dennis

TaxAlmanac

Personally I have always thought the distinction was whether or not the vendor has been paid. I can't see a theoretical difference between a revolving vendor charge card and an open invoice.?

( Answered 01/20/07 03:17 PM in TaxAlmanac ,Views by community 24 )

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Death_Taxes

TaxAlmanac

I read the back of my Lowe's credit card which states 'This credit card has been issued and credit will be extended by Monogram Credit Card Bank of Georgia" in very small print. There is no VISA or Mastercard logo on the front. I think this card, though issued by the vendor, differs from the revolving vendor charge like my mother once had at John Wanamakers and Gimbels. I would include purchases on the latter as not deductible until paid.

( Answered 01/20/07 03:35 PM in TaxAlmanac ,Views by community 24 )

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Lhhesscpa

TaxAlmanac

D&T, I'm not clear whether you and I concur or not, so I'll restate my point differently. Accounts like the Lowe's or Home Depot accounts are examples of revolving charge accounts. When the account holder charges purchases to them the seller gets paid and the account holder has made a loan. That's why those purchases are deductible on the date of purchase. BTW, the basic terms of those accounts aren't really very different from the department store accounts. Pay the minimum balance and you're account is in good standing, but incur finance charges on the unpaid balance. -- Larry Hess, CPA, Albuquerque, NM (http://www.taxalmanac.org/index.php/user:Lhhesscpa) - Talk to me (http://www.taxalmanac.org/index.php/User_talk:Lhhesscpa)

( Answered 01/20/07 04:48 PM in TaxAlmanac ,Views by community 24 )

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  • JR1
  • TaxAlmanac
  • commented

IRS says that charges on a credit card are the same as paid in cash. I don't understand the confusion...why would you try to find a way OUT of that?

( Commented 01/20/07 05:14 PM in TaxAlmanac ,Views by community 24)

Death_Taxes

TaxAlmanac

I agree, Larry, they are deductible when charged, and that is why I noted that Lowes takes its money from Monogram Credit Card Bank and states this. In the old days the department store did its own financing and I do not believe any business purchase there would be deductible until paid. "Old Days' meant mother carried a card that was metal, if I recall, and which was not swiped but imprinted. Clearly the plumber who goes into Weinstein Plumbing Supply and carries out plumbing fixtures, putting it on his tab with terms of net 30 days, cannot deduct this. Thirty years ago my boss started depreciating equipment and taking ITC after it was installed and placed in service but not totally paid because the vendor gave net 30 days. On audit he rightly lost the depreciation and the ITC on that portion [and never did get the ITC the next year because it was not the year it was placed in service].

I guess our difference is on my mother's department store accounts, or those type, where the vendor actually carries the finanancing and has not been paid.

( Answered 01/20/07 05:41 PM in TaxAlmanac ,Views by community 24 )

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Lhhesscpa

TaxAlmanac

Be patient with us, JR. D&T, I don't think the owner of the accounts matters. It's the terms. -- Larry Hess, CPA, Albuquerque, NM (http://www.taxalmanac.org/index.php/user:Lhhesscpa) - Talk to me (http://www.taxalmanac.org/index.php/User_talk:Lhhesscpa)

( Answered 01/20/07 06:01 PM in TaxAlmanac ,Views by community 24 )

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Death_Taxes

TaxAlmanac

Here we are, tax people, not lawyers discussing what we don't know for sure!!!! I always thought it was something about whether the debt could be reduced to a judgment without bringing suit. You are right, be patient.

( Answered 01/20/07 06:08 PM in TaxAlmanac ,Views by community 24 )

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JR1

TaxAlmanac

Or, I can just ignore you....!

( Answered 01/20/07 06:20 PM in TaxAlmanac ,Views by community 24 )

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Easier said than done JR...:)

( Commented 01/20/07 06:26 PM in TaxAlmanac ,Views by community 24)

Will, have I just been flamed?

( Commented 01/20/07 07:12 PM in TaxAlmanac ,Views by community 24)

No I don't think so. I think JR1 comment was in jest, and I was just commenting on the addictive nature of reading posts from seasoned professionals in general. (At least I find it addictive.) I'm always interested to read your comments...

( Commented 01/20/07 07:26 PM in TaxAlmanac ,Views by community 24)

Jbcpa

TaxAlmanac

A cash-basis business taxpayer calls his vendor on 12/30/10 and leaves a message on their answering machine to charge their MasterCard $20,000 for an outstanding bill. The taxpayer records the payment on their books as of 12/30/10. The vendor doesn't get around processing the charge until Jan. 4, 2011. Is this a deduction of 2010 or 2011 for a cash-basis taxpayer? A variation: the taxpayer reaches an actual person at the vendor on 12/30/10 and instructs them to charge the credit card $20,000. Still, the vendor doesn't get around processing the card until 1/4/2011. Which year should this be deducted? I tend to think that if the taxpayer didn't borrow and owed the money to the credit card company by 12/31/10 midnight, no deduction would be available. Note: The amount is material to the taxpayer (about $150,000 taxable income in 2010).

Thanks for your input.

( Answered 03/04/11 06:02 PM in TaxAlmanac ,Views by community 24 )

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Captcook

TaxAlmanac

If a cash basis taxpayer gets a call from a customer to wire transfer a payment on 12/30/10, but the transfer doesn't actually post to the clients account until 1/4/11, are you going to include it in income?

( Answered 03/04/11 07:01 PM in TaxAlmanac ,Views by community 24 )

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DaveFogel

TaxAlmanac

The deduction is whenever the charge is made to the taxpayer's credit card.

The IRS has confirmed this in two Revenue Rulings: Rev. Rul. 78-38 (http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl69ae/1/doc) 1978-1 C.B. 67 (use of a bank credit card to make a charitable donation is equivalent to payment by check; deduction is in year that the charge is made, not when the bank is repaid); Rev. Rul. 78-39 (http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl69b2/1/doc) 1978-1 C.B. 73 (use of a bank credit card to pay medical expenses; deduction is in year that the charge is made, not when the bank is repaid).

And a few court cases have confirmed this: Granan v. Commissioner, 55 T.C. 753 (1971) (taxpayer's repayment of loan which was taken out to pay medical expenses wasn't deductible; deduction occurred in the year in which the loan proceeds were used to pay the medical expenses); Clark v. Commissioner, T.C. Memo. 1971-61 (no deduction allowed for repayment of loans where the loan proceeds were previously used to pay business expenses); McDonald v. Commissioner, TC Memo. 1991-54 (no deduction allowed for repayment of a loan where the loan proceeds were previously used by the taxpayer to pay federal payroll taxes).

( Answered 03/04/11 07:02 PM in TaxAlmanac ,Views by community 24 )

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