Deductible expenses paid with credit card: In which tax year would they fall?
"According to this discussion, there was a Tax Court ruling that likened deductibility for charitable giving by credit card to business expenses incurred by businesses operating under cash-basis accounting.  (The point is made by Larry Hess on that site.) Short answer: According to this argument, you can claim the deduction when the charge is incurred.  You don't have to wait until you pay it back.  (Again this is for cash basis.) Publication 538 states that ""under the cash method of accounting, you generally deduct business expenses in the tax year you pay them.""  I think the ruling above was meant to clarify when the expense is ""paid"".  In my totally unofficial opinion, I suppose this makes sense.  If I go to Office Depot to buy a box of envelopes, I walk out with the envelopes at the same time regardless of whether I paid cash or swiped a credit card.  I wouldn't walk out thinking: ""HA!  I haven't actually paid for these yet.""  If the shoplifting alarm went off at the door and I was asked if I had bought those, I'd say yes, right? If this doesn't convince you, you can always get professional tax advice." "I'm assuming you're operating on the cash basis of accounting, based on your comment ""Cash, I think that's the only way for a sole propriator (sic)"" Consider: There are two distinct but similar-name concepts here: ""paid for"" (in relation to a expense) and ""paid off"" (in relation to a debt).  These both occur in the case you describe: Under the cash basis of accounting, when you can deduct an expense is based on when you paid for the expense, not when you eventually pay off any resulting debt arising from paying for the expense. Admittedly, ""cash basis"" isn't a great name because things don't solely revolve around cash. Rather, it's when money has changed hands – whether in the form of cash, check, credit card, etc.  Perhaps ""monetary transaction basis"" might have been a better name since it would capture the paid-for concept whether using cash or credit.  Unfortunately, we're stuck with the terminology the industry established." Assuming that it's not inventory that is sold in the following year or a depreciable asset, you can deduct it when you make the purchase. The courts have ruled that credit cards balances are considered debt. It's treated the same way as if you went to the bank, got a loan, and used cash or a check to purchase the items. On your accounting books, you would debit the expense account and credit the credit card liability account. This is only for credit cards, which are considered loans. If you use a store charge card, then you cannot deduct it until you pay. Those are considered accounts payable.  I'm an IRS agent and a CPA. Being a professional auditor and accountant, deduction against expenses are claimed in the year in which expenses has been incurred. It has no relationship with when it is paid. For example, we may buy on credit does not mean that they will be allowed in the period in which it is paid. This is against the fundamental accounting principles. I'm a CPA and former IRS agent and manager. Whether you are a cash or accrual basis taxpayer, you get to deduct the expense when your card is charged. Think of it this way: You are borrowing from the credit card company or bank that issued the credit card. You take that money to make a purchase of a product or service. You now have an expense and a liability to a third party. When you pay off the liability, you do not get to take a deduction. Your deduction is when you pay for the expense. Depending on what you purchased, you may have to capitalize it.
It would be unusual but it is possible that the expenses could be very high compared to your income. The IRS in pub 529 explains the deduction. You can deduct only unreimbursed employee expenses that are: Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. An expense is ordinary if it is common and accepted in your trade,   business, or profession. An expense is necessary if it is appropriate   and helpful to your business. An expense doesn't have to be required   to be considered necessary. The next part lists examples. I have cut the list down to highlight ones that could be large. You may be able to deduct the following items as unreimbursed employee   expenses. Damages paid to a former employer for breach of an employment contract. Job search expenses in your present occupation. Legal fees related to your job. Licenses and regulatory fees. Malpractice insurance premiums. Research expenses of a college professor. Rural mail carriers' vehicle expenses. Tools and supplies used in your work. Work clothes and uniforms if required and not suitable for everyday use. Work-related education. If the term of employment was only part of the year, one or more of the these could dwarf your income for the year. Before deducting something that large be sure you can document it. I believe the IRS computers would flag the return and I wouldn't be surprised if they ask for additional proof. "Many people who do transfer a balance from one credit card to another have no clue as to what is going on and how credit cards work. If you transfer a balance from one credit card to another, you are charged a fee of anywhere from 3% upwards (subject to a minimum of $10 or so) up front. If Credit Card A has balance $1000 and you transfer it to Credit Card B which is offering no interest for a year on the transferred balance, you owe Credit Card B $1050 (say). In most cases, that $50 has to be paid off as part of the following month's bill. If you are carrying a revolving balance on Credit Card B, that $50 will typically be charged interest from the day of the transfer. Your monthly bill will not (necessarily) include that $1000  you owe for one year or six months or whatever the transfer agreement you accepted says. If you tend to pay anything less (even a penny) than  full payment of each month's bill on Credit Card B, your partial payment will be applied to that $1000 first, and anything left over will be applied to the monthly balance. In short, if you don't pay in full each month, that $1000 will not be ""yours"" for a year; you may end up paying $50 interest for  borrowing $1000 for just one or two months, and the rest of your balance is the gift that keeps on giving as the credit card company likes to say. UPDATE: This has changed slightly in the United States. Any amount paid over the minimum amount due is charged to the higher-interest balances. So in this case, if you had $1000 at a 0% promotional rate and a regular balance of $500, and the minimum payment was $100, and you paid $150, $100 would pay down the promotional balance, and the extra $50 would pay down the regular balance.  About the only way to make the deal work in your favor is to Transfer money only if you have paid the full amount due   on the last two statements before the date of the transfer and are   not carrying a revolving balance. Check your monthly statements   to make sure they show Finance Charge of 0.00.  Many people have   never seen such a sight and are unaware that this can be observed   in nature. Make sure that you pay each month's bill in full (not   the minimum monthly payment due) each month for a whole year   after that. Make sure that the bill containing that $1000 (coming out a   year after the transfer date) is also paid in full. Very many credit-card users do not have the financial discipline to go through with this program.  That is why credit card companies love to push transfer balances on consumers: the whole thing is a cash cow for them where they in effect get to charge usurious rates of interest without running afoul of the law. $50 interest for a one-year loan of $1000 is pretty high at current rates; $50 interest for a two or three month loan where the customer does not even notice the screwing he is getting is called laughing all the way to the bank. See also the answers to  this question" "Exactly what accounts are affected by any given transaction is not a fixed thing. Just for example, in a simple accounting system you might have one account for ""stock on hand"". In a more complex system you might have this broken out into many accounts for different types of stock, stock in different locations, etc. So I can only suggest example specific accounts. But account type -- asset, liability, capital (or ""equity""), income, expense -- should be universal. Debit and credit rules should be universal. 1: Sold product on account: You say it cost you $500 to produce. You don't say the selling price, but let's say it's, oh, $700. Credit (decrease) Asset ""Stock on hand"" by $500. Debit (increase) Asset ""Accounts receivable"" by $700. Credit (increase) Income ""Sales"" by $700. Debit (increase) Expense ""Cost of goods sold"" by $500. 2: $1000 spent on wedding party by friend I'm not sure how your friend's expenses affect your accounts. Are you asking how he would record this expense? Did you pay it for him? Are you expecting him to pay you back? Did he pay with cash, check, a credit card, bought on credit? I just don't know what's happening here. But just for example, if you're asking how your friend would record this in his own records, and if he paid by check: Credit (decrease) Asset ""checking account"" by $1000. Debit (increase) Expense ""wedding expenses"" by $1000. If he paid with a credit card: Credit (increase) Liability ""credit card"" by $1000. Debit (increase) Expense ""wedding expenses"" by $1000. When he pays off the credit card: Debit (decrease) Liability ""credit card"" by $1000. Credit (decrease) Asset ""cash"" by $1000. (Or more realistically, there are other expenses on the credit card and the amount would be higher.) 3: Issue $3000 in stock to partner company I'm a little shakier on this, I haven't worked with the stock side of accounting. But here's my best stab: Well, did you get anything in return? Like did they pay you for the stock? I wouldn't think you would just give someone stock as a present. If they paid you cash for the stock: Debit (increase) Asset ""cash"". Credit (decrease) Capital ""shareholder equity"". Anyone else want to chime in on that one, I'm a little shaky there. Here, let me give you the general rules. My boss years ago described it to me this way: You only need to know three things to understand double-entry accounting: 1: There are five types of accounts: Assets: anything you have that has value, like cash, buildings, equipment, and merchandise. Includes things you may not actually have in your hands but that are rightly yours, like money people owe you but haven't yet paid. Liabilities: Anything you owe to someone else. Debts, merchandise paid for but not yet delivered, and taxes due. Capital (some call it ""capital"", others call it ""equity""): The difference between Assets and Liabilities. The owners investment in the company, retained earnings, etc. Income: Money coming in, the biggest being sales. Expenses: Money going out, like salaries to employees, cost of purchasing merchandise for resale, rent, electric bill, taxes, etc. Okay, that's a big ""one thing"". 2: Every transaction must update two or more accounts. Each update is either a ""debit"" or a ""credit"". The total of the debits must equal the total of the credits. 3: A dollar bill in your pocket is a debit. With a little thought (okay, sometimes a lot of thought) you can figure out everything else from there." "If you earn $160 a week for 26 weeks, are unable to claim yourself, have no other income at all, you will earn $4,160, which falls under the standard deduction, in your case a bit over $4,500; per publication 17, it is $350 above your earned income, to a maximum of $6300 as of 2016.  (H/t Hart CO for the reminder.) In that case, if you paid no taxes (at all) last year (either did not file or filed and had 0 tax paid, so got a 100% refund), you could legitimately claim ""exempt"" by writing that on line 7.   However, you would be very close to owing taxes, so if you have any unearned income (interest from bank accounts, dividends from your non-sheltered college fund, etc.), you would possibly owe taxes.  You're also going to owe taxes if you have another ~$2150 of earned income from any other source (including things like mowing lawns, tutoring, etc.). Keep all of that in mind if you have any other sources of income other than the above." No, it's not possible. Even if you had no deduction or credits, your federal tax on $16,604 would be: $9075 @ 10% = $907.50 +  $7529 @ 15% = $1129.35 = $2036.85 That assumes you are filing as single. There must be more to the story.  Typo in your income numbers?  Also, what do you mean by a self-employment tax deduction? Maybe update your question to include a breakdown of everything you entered? Edit: As noted in Loren's answer, it seems that it is indeed possible in at least one case (self-employment taxes). "There are many people who have deductions far above the standard deduction, but still don't itemize. That's their option even though it comes at a cost. It may be foolish, but it's not illegal.  If @littleadv citation is correct, the 'under penalty of perjury' type issue, what of those filers who file a Schedule A but purposely leave off their donations? I've seen many people discuss charity, and write that they do not want to benefit in any way from their donation, yet, still Schedule A their mortgage and property tax. Their returns are therefore fraudulent.  I am curious to find a situation in which the taxpayer benefits from such a purposeful oversight, or, better still, a cited case where they were charged with doing so. I've offered advice on filings return that wasn't ""truthful"". When you own a stock and cannot find cost basis, there are times that you might realize the basis is so low that just entering zero will cost you less than $100 in extra tax. You are not truthful, of course, but this kind of false statement isn't going to lead to any issue. If it gets noticed within an audit, no agent is going to give it more than a moment of time and perhaps suggest, ""you didn't even know the year it was bought?"" but there would be no consequence.  My answer is for personal returns, I'm sure for business, accuracy to the dollar is actually important." Yes, provided you're not over the IRA deductibility limit as well. –  JoeTaxpayer♦ Aug 4 at 18:02 Note that if you get refunded for excess contributions, it usually happens in the following year, in which case it doesn't affect the year where these contributions occured -- rather, the refund counts as taxable income in the year you received the refund. –  user102008 Aug 11 at 8:11 This answer assumes you're asking about how to handle this issue in the USA. I generally downvote questions that ask about a tax/legal issue and don't bother providing the jurisdiction. In my opinion it is extremely rude. Seeing that you applied for an LLC, I think that you somehow consider it as a relevant piece of information. You also attribute some importance to the EIN which has nothing to do with your question. I'm going to filter out that noise. As an individual/sole-proprietor (whether under LLC or not), you cannot use fiscal years, only calendar years. It doesn't matter if you decide to have your LLC taxed as S-Corp as well, still calendar year. Only C-Corp can have a fiscal year, and you probably don't want to become a C-Corp. So the year ends on December 31, and whether accrual or cash - you can only deduct expenses you incurred until then. Also, you must declare the income you got until then, which in your case will be the full amount of funding - again regardless of whether you decided to be cash-based or accrual based. So the main thing you need to do is to talk to a licensed tax adviser (EA/CPA licensed in your state) and learn about the tax law relevant to your business and its implications on your actions. There may be some ways to make it work better, and there are some ways in which you can screw yourself up completely in your scenario, so do get a professional advice.