Ever wonder when credit card charges are deducted?
Here recently, I have been asked by several people about when credit card charges are expensed. Business owners that know they are a cash basis taxpayer get confused on when to deduct their business expenses paid with their credit card. The question that gets asked is do I deduct the expense when the charge takes place or whenever I pay the credit card bill? This makes the most impact at year end and they want to know which year they will be deducting the expense. The answer is that credit card transactions are treated as being expensed at the time of the charge. So the expense takes place at the time of the transaction and the subsequent payment is just the reduction of the debt.
Here is a quick example:
John of ABC Inc. goes to Best Buy and purchases a new laptop on 12-29-11 with his business credit card. He typically pays off his credit card each month and pays it on 01-12-12. The expense for the laptop is taken in 2011 because of credit card charges being considered paid/expensed at the time of the charge.
You want to make sure that you are expensing your credit card charges when they occur and not when you have paid the credit card bill. I have seen business owners be misinformed about this and end up having to pay taxes earlier than they should have due to expensing it in the wrong year.
Feel free to contact us with any questions you may have about your accounting, business, or taxes.