Business and Personal Credit Card use

[DMICPA]

Client is an S-corp. sole owner. Runs about $100,000 of Amer Express charges on the business yearly. Each statement is about 15 pages so there are 180 pages a year.

Client carries over a balance and has finance charges of about $8,000 yearly. So far I have been deducting it thinking it is for the business.

This year I carefully combed through the charges and there are a few personal charges on this Credit Card that I classified as S-Corp distributions to shareholder.

This would naturally mean that a small portion of the interest may not be deductible as finance charges because some of the carried over balance is for personal items.

However, I cannot see me spending a 100 hours on calculating which is which. Since they are distributions I treated all as business related.

I am thinking that I either throw out the entire finance charges or somehow allocate the personal verses business charges and the personal interest would be disallowed.

Many years ago an instructor said at a continuing education seminar that if there is one penny personal, the entire finance charges are not deductible but I cannot find that anywhere.

Anyone have any ideas? Maybe the total personal charges over the total charges and multiply that fraction to the interest expense and call that personal, non deductible.

[Gretel]

I believe the instructor is right since you would need to proof interest charges for biz part. I deem this as impossible.

[oceanlovin'ea]

out of $100,000, how much were the personal charges? If you are talking a few hundred dollars, that would be a very small percentage of the interest that would be personal. I think the answer might be in the amount of personal charges.

A few years ago, I had a s corp. A struggling young family and father had a s corp. They juggled credit cards like crazy. Wife was very good about telling me which were personal charges. I prorated it all out. I had a worksheet that I started but my employee/husband kept it up for me. Maybe that wasn't the correct way to do it but that is what I did. Never had a problem.

Linda, EA

[ChEAr$]

Back to square one for a moment. Is this credit card in his personal name or a corporate credit card?

If the former, no deduction for interest. The payments would be in the nature of an (unwritten) accountable plan.

If the latter, follow the secret of success in accounting: Pro rate; Pro rate: and Pro rate.

[nkustura]

Pro-Rate

I would pro-rate the finance charges to business and personal spending.

[Bees Knees]

Usually court cases that throw out finance charges on credit cards are cases where the taxpayer has poor or sloppy records.

If you do the bookkeeping and receipts and accountable plan and travel logs and entertainment purposes and interest tracing documents all correctly, you should be able to make a good argument for allocating credit card interest between business and personal expenses.

[Golden Rocket]

Throw out the baby with bathwater?

Many years ago an instructor said at a continuing education seminar that if there is one penny personal, the entire finance charges are not deductible.

Does this guy practice tax preparation? Does he have any customers?

He qualifies for an appearance on the new reality show -- "America's Most Extreme"

[Gretel]

I agree that a good argument can be made for proration of interest expense going by common sense. BUT ...

1. Since when does the IRS has to follow common sense?
2. It is impossible to even come close to an accurate interest calculation because
A. For each personal charge you would need to calculate the number of days
B. All the charges ever since the first interest charge will effect the interest calculation

If not material, all this is a moot point of course.

[jsamans]

I agree that a good argument can be made for proration of interest expense going by common sense. BUT ...

1. Since when does the IRS has to follow common sense?
2. It is impossible to even come close to an accurate interest calculation because
A. For each personal charge you would need to calculate the number of days
B. All the charges ever since the first interest charge will effect the interest calculation

If not material, all this is a moot point of course.

But if the personal charges are allocated as distributions to the shareholder, then isn't the interest associated with those charges actually the real cost of providing the distribution (in the same way that a business can take out a loan to make a distribution)? It seems to me that, if properly allocated as taxable income to the recipient, then these would be legitimate business expenses (along the same lines as how the value of personal-use mileage of a company-owned car can be tallied and added to an employee's W-2 as taxable income, after which the business, having accounted for the expense in this manner as a taxable fringe benefit, is entitled to claim 100% of the depreciation and other expenses as business use).