Credit card charges for closed business

[thomtax]

New schedule C client this year

Client operated a car repair garage. Closed business in 2006 and there will be no further operating income in the future. The repair parts were charged on credit cards in previous years and were expensed to business when payments made on credit cards. At the time of closing the business, there is a substantial amount owed on the credit cards that has not been paid. Can this balance be legitimately deducted in 2006?

Thanks for all your advice and opinions.

LT

[Bill Tubbs]

should have been expensed when charged

Expenses charged on a credit card are considered paid when charged and should have been expensed/capitalized at that point -- the exception to this if it is was a store card that the store processed.

So, what should be done is the open years amended to write off the expenses when they were charged (unless the exception above applies).

Bill

[GIMoe]

Credi Card

The repair parts were charged on credit cards in previous years and were expensed to business when payments made on credit cards.

In general, charges on crdeit cards are treated as paid when the charges are incurred.

Can this balance be legitimately deducted in 2006?

No. Only the items paid for in 2006 should be expensed in 2006. Your best bet would be to amend the previous years to claim those expenses.

[OldJack]

>>were expensed to business when payments made on credit cards. <<

That is the mentality of some accountants that think cash basis means you have to write a check.

[thomtax]

Thanks for your replies. The problem with going back to the previous years to amend is that they showed a loss in those years already and got back everything that they had paid in for taxes. This would just increase the loss in that year, but would not get them any additional benefit that I can see. Of course I'm tired and probably overlooking something obvious, so if I'm not thinking straight, please tell me.

Thanks again.

[S T]

Would it Not

But, you can't take the deduction in the current year, as the expenses were paid for in a prior year. So to amend the open prior years, would create more loss. Which then would create a NOL that you will be forced to carryback(because of election to carry forward not on a timely filed return).

So then after you carry back the NOL and use where you can, and then bring forward, could save some tax dollars.

Just a thought!

Sandy

[OldJack]

As the individual pays off the credit card (portion that was never deducted) he can deduct the payments as a business bad debt on Sch-C even though there is no Sch-C income.

[GIMoe]

Business bad debt

As the individual pays off the credit card (portion that was never deducted) he can deduct the payments as a business bad debt on Sch-C even though there is no Sch-C income.

That is a very clever work around. Instead of amending previous years and delaing with any possible NOL, just claim business bad debt on future returns until card is paid off?

[thomtax]

Thanks Old Jack, GIMoe and others. The business bad debt route will be a good route to go.
Your help is sincerely appreciated.

LT

[Davc]

That is a very clever work around. Instead of amending previous years and delaing with any possible NOL, just claim business bad debt on future returns until card is paid off.

Clever maybe, correct, NO.

[Black Bart]

Sic 'im, Jack!

Clever maybe, correct, NO.

Look here Billy Bob -- I mean Billy Jack -- no, I mean OldJack -- Like Veritas says, are you gonna do somethin' or are you just gonna stand there and bleed?

Just pretend he's Bees. A smashing citation is called for here (I know you've got one somewhere there in your briefcase).

[New York Enrolled Agent]

Thomtax

I don't believe you don't need to use the "bad debt" or any other approach when you have Rev Ruling 67-12 available to you.

I think it covers your situation. Here is the headnote:

[start]Ordinary and necessary expenses, incurred in a trade or business in prior years and paid in the current taxable year, by an individual taxpayer using the cash receipts and disbursements method of accounting, are deductible under section 162 of the Internal Revenue Code of 1954 even though the trade or business has been discontinued. [end]

Assuming the expenses were of the type that could have been deducted, if paid while the business was in existence, they can be deducted as they are currently paid.

[veritas]

nice cite

Good thing too because that's how I have done it for years.

[Davc]

Thomtax

I don't believe you don't need to use the "bad debt" or any other approach when you have Rev Ruling 67-12 available to you.

I think it covers your situation. Here is the headnote:

[start]Ordinary and necessary expenses, incurred in a trade or business in prior years and paid in the current taxable year, by an individual taxpayer using the cash receipts and disbursements method of accounting, are deductible under section 162 of the Internal Revenue Code of 1954 even though the trade or business has been discontinued. [end]

Assuming the expenses were of the type that could have been deducted, if paid while the business was in existence, they can be deducted as they are currently paid.

However, these were paid in previous years by CC so that is not applicable.

[thomtax]

Just wanted to let you know that all the thoughts and ideas are truly appreciated.

LT