Are expenses based on the year paid or when they were obtained?

Question

e.g.1 - a water bills 4th quarter statement spans 2005 / 2006. You have no idea what it cost during a given year, only by quarter.

e.g.2 - a credit card statement spans 2 years as well, but you do know when the expense incurred. For those expeneses incurred in late December and paid in early January, do they become a 2005 or 2006 expense?

How do I handle expense taxes in each case?

Answer 1

I assume you are deducting business expenses using the cash method of accounting.

For utility expenses, deduct the expenses in the year you paid them, assuming you have received the service for the period you are paying. In other words, you cannot deduct an expense paid in advance for a service.

For a major credit card charges, the expense is considered paid on the day it is posted to your account. So if you incurred deductible expenses in 2005 and paid those expenses in 2006, they are deducted in 2006.

There are other subtleties regarding when to deduct expenses, like leases and insurance. There is a detailed discussion in IRS Publication 535 Business Expenses.

http://www.irs.gov/publications/p535/ch01.html#d0e712

Answer 2

You did NOT mention whether the expenses were paid for as an individual, an individual with a business (i.e. sole-proprietor) or a business. Also missing is the basis of accounting.

Taxpayers are considered using cash-basis accounting which means that you get to deduct the expenses when it's paid.

1. Water bill - the date you pay the bill is the year you deduct the expense (if deductible in the state you live in or whether you have business. Water bills are nondeductible on the federal return.)

2. Credit card expenses - you get the deduction on the DAY you pay it REGARDLESS of WHEN you pay the credit card bill. Credit card payments are considered CASH for TAX PURPOSES!

Think of it like this... Credit cards are more like loans. You use the loan proceeds to buy stuff. The day you buy the stuff, you deduct it! When you repay the loan, it's NON-deductible (unless some or all of the credit card expenses are Business-related. Then the interest charges related to those purchases ARE deductable)!

For example...
Buy supplies at office supply store for $500 for business on 12/29/06 on credit but pay credit card on 1/17/07 of the following year.
You get the deduction of $500 in 2006 NOT 2007!

NOW...
Corporations generally use the Accrual basis... simplistic view provided only....
Accrue the expense when earned ... Again, simplistic view here...

When you receive the bill, you ACCRUE the expense and get a DEDUCTION even though it's not yet paid!

Credit card purchases are handled similarly to the cash basis that you get to write off the expense (since it was charged and paid) but you must accrue the liability similar to the water bill.

The proper accounting transaction... (don't freak out here)..
Deduct the expense and accrue the payable.

You should consult with your tax adviser or a local tax professional for further assistance.

Answer 3

You should be doing your 2005/6 taxes. 05 is late. In NY you would pay the taxes quartely on the water bills. If you got 3 months worth claim them in one . you would multiply 3 x 4 to get the 12 mos. On the cards, you would pay the amount on 2006 and the rest would go on 07.

Answer 4

If these are business expenses and you are on the cash method, the water bill is when paid.

Credit cards are unusual. If they are general credit cards MC/V, is considered paid when you paid the store with a credit card. For store charges and everything else, it's when you pay the ultimate bill.

Answer 5

It depends on where you live.