Monday, April 7, 2008

Business expense purchases made via bank credit card are deductible even tho' unpaid.

Hi June,

I live in Holland, PA, about 15 miles north of Philadelphia. I'm doing the taxes for my boyfriend who started a carpentry business this year in August.

He has put a few expenses and purchased materials on a business credit card. He has not paid off the credit card bill in full, it carries a balance. Can I add up these items and include them as itemized deductions, even if they haven't technically been paid for yet?

Also what do I do with the payments made to the credit card during the year?

Thanks so much, your site is very useful, and I enjoy your writing style.

Best regards,
Karen



Dear Karen,

Any charge made on or before December 31 via a bank credit card is an expense for that year regardless of when the credit card balance is paid. You ignore the amount of payments made on the credit card.

For a store credit card it is a deductible expense in the year it is paid. Your deduction each year is the amount paid on the credit card.


Use your Citibank Mastercard to buy your indie business a computer as a Christmas gift? It's totally deductible in the year you bought it.

Were you to buy that same computer with a BestBuy credit card it is not deductible until you've paid off BestBuy.


Want to know why? Let's say in the first scenario you bought the computer at BestBuy. BestBuy is paid for the computer by Citibank. You owe Citibank the money.

In the second scenario, Best Buy sold you the computer and still owns it until you pay BestBuy the balance.


It's similar to purchasing a home from Harry and Hortense using mortgage financing. Harry and Hortense receive payment for their house from the bank. You get the house but owe the bank the money. If you don't pay the mortgage the bank can take your house. That's what's happening to thousands of people right now who cannot make their mortgage payments.

-- June

2 comments:

Coach G said...

Please remind readers that the computer is totally deductable only if they use a SEC. 179 deduction.

June Walker said...

Hi Coach,

You are sort of correct but not correct.The phrasing that you use can be misinterpreted.

If a computer is used 100% for business it is fully deductible as business equipment.

There is a choice of how equipment may be deducted on a tax return. It may be depreciated -- which means that the cost may be deducted over a period of years. Or the entire cost may be deducted in the year the equipment is available for use. That's what you refer to as IRS code section 179. Or you may do a combination of depreciation and code section 179 expensing.

An indie's tax situation and a savvy tax pro will determine the best treatment.

-- June