If you operate a business that runs on a calendar-year basis, you may be thinking about what you can still do in December to help your tax situation. One thing to keep in mind is the treatment of business expenses paid late in the year – that is, whether the business expense would be deductible in this year or next.
The rules for deducting business expenses paid with a credit card are similar to the rules for individuals taking a deduction for charitable contributions. But, there are some variations depending on how you operate your business and whose name is on the credit card.
If you operate your business as a sole proprietor, the day you charge a purchase to your business or personal card is the day the expense is deductible. Therefore, it may make sense for you to buy office supplies and other business necessities before the end of the calendar year.
If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.
But if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you for the corporation to realize the deduction. Thus, you should submit your expense report and have your corporation reimburse you before midnight on December 31.
Records to Keep
For all expenses keep these two points in mind:
- You need to prove what you bought.
- You need to prove that you paid for what you bought.
Step 1: What You Bought
Generally, the receipt or invoice will prove both the description of what you bought and how this purchase relates to your business. With entertainment at a restaurant, the receipt that proves what you bought is the receipt that shows the details of what you had to eat and drink.
Step 2: What You Paid
Tax law considers the charge to a credit card as payment, regardless of when the card gets paid. Thus, you can prove payment by credit card with either the credit card receipt that shows the total charge or the credit card statement.
The canceled check proves payment by check. The bank statement proves payment by electronic transfer.
Finally, as a general rule, don’t pay in cash. This will only lead to questions from an auditor that can be avoided by paying by check or credit card.
There is a great deal more to keeping adequate records, but if you keep these few points in mind, you have a great start.
For more information, contact your tax advisor or see the section about recordkeeping in Publication 583, Starting a Business and Keeping Records, available on-line at http://www.irs.gov/pub/irs-pdf/p583.pdf