SCorp Los because of expenses charged on Credit Cards

[Dan5]

S-Corp is cash based. At the end of the year corporation bought materials using credit card.
Debit to Material Expense Account and Credit to Card Payable Account. As I understand you deduct expense when charged on credit card like Master or Visa, not paid when using cash tax accounting.

Because expense amount was substantial in comparison to the total income it caused Ordinary Loss on 1120S. There is not enough basis to for this loss.

What could be solution to this problem?

[Bird Legs]

Inventory

How much inventory did client have on hand at end of year? This is deducted from cost of sales even though he is on cash basis.
You cannot write the inventory off if it is still in inventory.

[Dan5]

This is small construction company. It does not keep inventory. All materials are used during their work.
However, it is possible that some materials were not used on the jobs until next year.
Should I create Prepaid Materials Account then?

[JG EA]

Or Inventory

He'll ask you to anyway the next time he goes out to get a loan based on his P&L.

[cpadan]

Just off the top of my head, wouldn't the credit card debt increase basis equal to the expenses which created the loss?
Dan

[ChEAr$]

Which credit card

This is small construction company. It does not keep inventory. All materials are used during their work.
However, it is possible that some materials were not used on the jobs until next year.
Should I create Prepaid Materials Account then?

was used? Was it a card owned by the corporation? OR, were the purchases charged
to the card of one of the owners?

If the latter, you have to correctly classify the credit.
Alternative would be since on cash basis, to take the expense (or debit inventory)
in the year in which owner was reimbursed.

[lbbwest]

Can't have it both ways.

"Just off the top of my head, wouldn't the credit card debt increase basis equal to the expenses which created the loss?"
Dan

Poster stated debit to materials credit to credit card payable. Had stockholder purchased on personal credit card he could have increased his capital account by the amount of the purchases, or he could have set up that same amount as a note payable to shareholder (with the adequate documentation etc.) and utilized the loan as basis.

But carrying the credit card as a third party liability won't create basis.

[cpadan]

Your right llb, the top of my head must of been thinking of a partnership,

[Dan5]

This is S-corporation credit card not the owner

Do I understand correctly then that I need to debit Inventory account to avoid problems with potential loss and shareholder basis. Any other ideas?


What about similar problem when fixed asset is bought and deducted using sec 179 using company owned credit card. S-corp has deductible expense for this year with corresponding credit card payable value.
This causes mismatching of income and expenses. It could cause negative AAA and then problems with basis, possible capital gain.

Any thoughts how to deal with this issue and if it is any different than with regular expenses?