Cash Basis Taxpayer & Credit Card Charges

[JohnH]

From time to time I second guess myself on this one.  Taxpayer is a landscaper reporting on the cash basis. When he charges expenses to his credit card (Visa, Amex, Master Card), we deduct December purchases in the year of the charge, rather than the year of sale.  He also has open accounts with local nurseries and equipment dealers.  Those expenses are deducted when the payment is made rather than when the charge is incurred. 

But then he also has a hybrid situation. His Home Depot branded charge card can only be used at Home Depot.  I have been operating under the assumption that those charges are also deductible in the year of the charge, rather than time of payment. My reason is based on the fact that the Home Depot credit card is underwritten by Citibank, so this is essentially the same as a credit card charge rather than an open account with a specific vendor.  Most years the year-over-year ending balances net one another out, so the issue isn't particularly relevant.  But in 2017 the end-of-year balance on the Home Depot card is much greater than the opening balance, so it has a significant effect on the tax return.  Thus the second-guessing.

I've never been able to find IRS guidance on that position, only info from a couple of CPA web sites. Just wondering if anyone here can offer an opinion on when the Home Depot charges are deductible. 

[jklcpa]

I think your interpretation of "cash" payments is too literal.  The IRS recognizes that payments of expenses are frequently made via credit card, basically a third party extending a loan to pay the expense, and that expense has been paid at the time the charge is incurred.  

I don't have an IRC to provide, but you migth read Rev Proc 92-71 that discusses proof of payments including credit cards. There's a general discussion in the background section, and then paragraph .06 is specific to credit cards.

Give me a minute to get back to my desktop and I'll update the post with a link.  

https://bradfordtaxinstitute.com/Endnotes/Rev_Proc_92-71.pdf

Edited May 10, 2018 by jklcpa
added link

[JohnH]

Can't believe the typo I overlooked. 

My second sentence should read:

When he charges expenses to his credit card (Visa, Amex, Master Card), we deduct December purchases in the year of the charge, rather than the year of PAYMENT. 

 

Thanks for the link, Judy.  That helps.

[Max W]

Store credit cards (Home Depot, Macy's, etc) get a different treatment.  The deduction is taken When Paid.

[JohnH]

Max: That's the issue.  I have one reference from a CPA firm that differentiates between open accounts and store credit cards.  Their view is that store credit cards underwritten by credit card issuers are essentially the same thing as general-purpose credit cards, because of the existence of the third party.  Fact is, the money is owed to the credit card issuer rather than to the store.  My problem is finding clear IRS guidance either way.

 

[DANRVAN]

2 hours ago, Max W said:

Store credit cards (Home Depot, Macy's, etc) get a different treatment.  The deduction is taken When Paid.

I don't think that makes any difference. Case law has established a general rule that an expense charged to a credit card is treated as paid with borrowed money.   Rev rul 78-38;  Granan v. Com; and other cases confirm this.

Your client is borrowing from Citibank to pay Home Depot so go ahead and take the deduction.

 

 

[JohnH]

Leave it to you folks to steer me in the right direction.  After searching on Rev Rul 78-38 I found this gem, dating all the way back to 1978.

https://scholarlycommons.law.wlu.edu/cgi/viewcontent.cgi?referer=http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0ahUKEwj4ore1lPzaAhXBm-AKHUJBAdMQFggtMAE&url=http%3A%2F%2Fscholarlycommons.law.wlu.edu%2Fcgi%2Fviewcontent.cgi%3Farticle%3D3009%26context%3Dwlulr&usg=AOvVaw1NMoONCoUbPXKPiXg6vQiS&httpsredir=1&article=3009&context=wlulr

After a cursory reading, it appears the issue revolves around the type of agreement under which the store card is issued.  Whether a cash basis taxpayer can deduct an expense with a card issued under a "bipartate" agreement is highly questionable, but it is definitely deductible using a card issued under a" tripartate" agreement.   Now I'm searching  to see if I can find anything more recent to either back this up or negate it.

It's beginning to make sense to me now, and I see why there are various opinions on the matter.  Thanks to everyone for your input. 

 

[SaraEA]

I think that "back in the day," store cards were issued by the store, so there was a difference between store credit and branded credit cards.  Now most of them are issued by banks, so those old rules may not apply in many situations like yours.  It was most likely a political thing, with the banks lobbying congress for special treatment.  Heck now you can get a credit card branded from your alma mater, or the NRA, or AARP, or Ducks Unlimited, and it still comes from a bank.

[JohnH]

You're correct, but the 1978 W&L Law Review recognizes both types of cards and clearly distinguishes between them.  It is actually spot on regarding this issue and provides a clear answer to my question (unless something new has developed in the interim).  In any case, I think we're on solid ground to deduct the Home Depot charges for the cash basis taxpayer, even though we still don't deduct the open account charges with most other suppliers until the bill is paid.

[DANRVAN]

14 hours ago, JohnH said:

Whether a cash basis taxpayer can deduct an expense with a card issued under a "bipartate" agreement is highly questionable, but it is definitely deductible using a card issued under a" tripartate" agreement.   Now I'm searching  to see if I can find anything more recent to either back this up or negate it.

A charge from a card with a "bipartate" agreement is never currently deductible because it does not involve a third party as in the case of  a" tripartate" agreement.  This is supported by years of case law, why are you still digging?

[JohnH]

Great question.  This morning I'm no longer digging.  It's settled in my mind.  My initial reasons for continuing to dig last night were:

1) Some knowledgeable people I know (both personally and on some web sites) don't make the distinction.  I was just making sure that nothing had changed - 1978 to now is a very long time.

2) Sometimes my OCD just takes over.

3) I was watching Bing Bang Theory (what a great season finale !), so anyone watching that sitcom just naturally allows their brain to wander to all sorts of odd places.