Revolving line of credit for major purchases

[Jesse]

Auto mechanic purchases tools from a major industrial supplier on his account which acts as a revolving line of credit.

The tools purchased range from multiple small items less than $500 and multiple large items in excess of $1,000 and everything in between. The mechanic just keeps paying $1,000 a month on account and never seems to catch up to the purchases.

With this type of credit line would it be considered similar to a credit card or a loan for the tools?

[spanel]

I would take it no different then if it was a Visa card that he was using.

Chris

[BOB W]

If it is not a national credit card you cannot deduct unpaid charges. But "placed in service" rules do apply for depreciable assets. I believe the rule of $100 and more than 1 year usefull life still is applicable. And being paid for may not apply.

But you should set up a payable for all "Placed in service" purchases.

[erchess]

Citation Bob?

Bob do you have a citation for the rule about national credit card or at least a suggestion on the terms for a search in my research software?

[BHoffman]

In TC Summary Opinion 2001-155 the Tax Court said "We have previously held that for cash-basis taxpayers, the “use of a credit card for an otherwise deductible expense qualifies as a payment in the year the credit card charge is made, regardless of when the issuer is repaid”. Schroeder v. Commissioner, T.C. Memo. 1986-583; see also Goldman v. Commissioner, T.C. Memo. 1990-8.

[Jesse]

The tools purchased are depreciable assets and that is why I'm questioning what to do in this case.

Many of the assets(tools) are placed in service before being "paid" for, that is they are purchased on the line of credit. Can the purchase be considered as complete when mechanic takes possession of the tools?

[erchess]

TY Bhoffman

I think I see your point. If I do, what you're saying is that the financing must be through a legally separate third party and the mere fact that the taxpayer has signed a note with the vendor does not mean that the product is considered to have been paid for. What I was questioning in Bob's response was his specifying a national credit card. I still think that even if the vendor only has one location but offers a credit program through a legally separate entity then items are considered paid for when charged to that line of credit. I also must admit that I hadn't considered the requirement that it be through a legally separate entity but I already knew if I had thought about it that the bare signing of a promissory note to pay something did not mean it was considered paid at that time.

[erchess]

Jesse I don't have a cite

but I think I'm right in answering your question "yes". Real property is nearly always purchased with a mortgage but basis for all purposes is the contract sales price. I don't think I have ever dealt with someone who paid expenses for something other than real property without writing a check, paying cash, or signing a charge slip for the full amount. But if I did, I'd count the contract sales price as the depreciable value. On the other hand, for items I was expensing other than through a section 179 election, I wouldn't consider them paid for by a cash basis taxpayer until paid with cash, check, or credit extended by a legally separate entity from the seller. Note that nearly all merchant credit cards are offered through entities legally separate from the merchants.

[S T]

Mechanic Tool Purchase

Jesse, are you asking about tool purchase from Snap-On, Mac Tools or Matco, or the like?
If so they offer the mechanics a credit plan - to purchase tools and then the employee/mechanic pays weekly or bi-weeekly- (revolving - seems to never end) Major purchases such as Roll Away Tool Boxes are then also financed over a 3-5 year period or such.

Here is a link to an article written http://gozips.uakron.edu/~vlf5/vlf5_module2.pdf
also a TA discussion http://www.taxalmanac.org/index.php/..._card_expenses

On the weekly payments of purchases of small tools - I have always thought it was treated as any other Vendor Card such as Staples (Specific Business Supply Acct) - you can't use the charge for write off, have to use the payments - unlike the charges on Bank Cards (Visa/MC, etc), which can be deducted when charged and not paid.

On the finance contract for large items - I usually treat as any other finance purchase agreement - depreciating the purchase and deducting the interest according to an amortization schedule.

Hope this helps, maybe I have been doing it wrong

Sandy

[Jesse]

Jesse, are you asking about tool purchase from Snap-On, Mac Tools or Matco, or the like?

That is exactly what I'm asking about. This could get a little messy! Thanks all for the help!

[dtlee]

I think I see your point. If I do, what you're saying is that the financing must be through a legally separate third party and the mere fact that the taxpayer has signed a note with the vendor does not mean that the product is considered to have been paid for. What I was questioning in Bob's response was his specifying a national credit card. I still think that even if the vendor only has one location but offers a credit program through a legally separate entity then items are considered paid for when charged to that line of credit. I also must admit that I hadn't considered the requirement that it be through a legally separate entity but I already knew if I had thought about it that the bare signing of a promissory note to pay something did not mean it was considered paid at that time.

I agree with this perspective.

Once the purchaser has paid for something through a third-party obligation like this, it is an allowable expense. It does not have to be a credit card. It does not have to be a card of any kind. A car purchased with a loan through a bank or finance company would qualify. The purchase of a printer using PayPal Smart Connect (a revolving charge) to finance it would also be deductible when financed.

The scenarios where it would not be allowed are diminishing. When I started doing taxes, every department store and gasoline company had their own credit card. Now, nearly everything purchased on credit is through a third party (even though the name on the card still says "JC Penney" or "ExxonMobil"). The last department store chain that had their own credit department in this area closed about 8 years ago.

It is getting harder and harder to find any company who does their own financing. The orthodontist my daughter used allowed me to make payments over time and those were only deductible when paid. Now, this same office uses a third party to finance these transactions so that they don't have to be dunning patients for money (no...I was not the reason why they changed) and the cost is deductible when financed by the third party.

[dtlee]

On the weekly payments of purchases of small tools - I have always thought it was treated as any other Vendor Card such as Staples (Specific Business Supply Acct) - you can't use the charge for write off, have to use the payments - unlike the charges on Bank Cards (Visa/MC, etc), which can be deducted when charged and not paid.

I am glad we are discussing this topic...I would sure like to get something definitive about this.

Just wondering where you got your Staples Card from and/or how old it is.

My Staples card is issued by Citibank (South Dakota) N.A. and that is who is handling the financing on my purchases from Staples when I use it there. Is yours directly with Staples?

[BOB W]

Many years ago, and I have not heard of any change, IRS made it very clear store revolving credit was not like a national credit card, like Visa, AmEx, etc. Thus OPERATING EXPENSES could only be deducted when paid using store revolving credit.
(I don't disagree with those that say "Store Revolving Credit" is a thing of the past.)

When it comes to mechanics. almost every item they buy is $100 or more and has a useful life of more than 1 year. These items are not operating expenses. So in the case of Jesse's question, paid or unpaid shouldn't matter because "Placed in Service" should prevail to allow the deduction through depreciation.

[Gary2]

Here is a link to an article written http://gozips.uakron.edu/~vlf5/vlf5_module2.pdf
also a TA discussion http://www.taxalmanac.org/index.php/..._card_expenses

I don't see taxes discussed in that first article. It's not clear from the TA discussion whether the conclusion is that the distinction doesn't actually exist anymore, or that actual practice is that the vendors are so rarely the same entity as the creditor these days that the question is no longer relevant.

Another, non-business area where this comes up relates to certain medical expenses that are often financed: orthodontics, hearing aids, and I think dentures. Particularly with orthodontics, I'd think one needs to be clear about whether it's a fixed amount that's been financed through credit (even with no explicit finance charge) or the orthodontist has simply chosen to charge per visit.

[dtlee]

The distinction I am making (or trying to make) is that I think it depends on the way the credit is handled.

If I am not mistaken, Snap-On Tools provides the credit on their accounts but Mac Tools uses financing arranged by HSBC.

Despite the similarity (go to the tool company and buy the tools on a payment plan with the company's name on it), my interpretation is that HSBC is a third party whereas Snap-On Credit probably is not. However, I am not 100% sure on the latter.