If a cash-basis business uses a credit card for business expenses, are those purchases deductible right away, or later on when the credit card debt is paid?
Joe the Window Washer is a sole proprietor using the cash method of accounting. In December 2015, Joe uses his credit card to purchase $500 worth of supplies. The credit card bill isn’t due til January 2016. Does Joe get to deduct the $500 in 2015 or 2016?
The deduction for business expenses purchased with a credit card is taken in the year of the purchase, regardless of when the credit card bill is paid. In our example above, Joe will take the $500 supplies deduction on his 2015 tax return.
See Revenue Ruling 78-39. This Ruling deals with medical expenses of an individual, but according to the PPC 1040 Deskbook:
“Presumably this same logic applies to any expenses a cash-basis taxpayer incurs by charging a credit card, including business expenses.” (From Key Issue 11A: Methods of Accounting, PPC’s 1040 Deskbook.)
Revenue Ruling 78-39 cites an earlier Tax Court case called Granan v Commissioner from 1971. Here’s what the Tax Court said in that case (citations omitted):
We know of no case dealing with the deductibility of payments on a loan obtained in a previous year to pay medical expenses. However, the general rule is that when a deductible payment is made with borrowed money, the deduction is not postponed until the years in which the borrowed money is repaid. The rationale for the rule is that taxpayers should not be able to elect the year in which expenses can be deducted from income.