Individuals, except in very rare circumstances, are cash basis taxpayers. Many businesses have elected to be taxed on the cash basis of accounting. For income taxes, this means your deduction is allowed when the expense is paid, not when the expense is incurred. For example, if you went to the dentist on December 16th but didn’t pay the bill until January 15th, the medical deduction would be allowable in 2011, not 2010. Or if you bought operating supplies for your business and charged them on your account in December 2010 and didn’t pay the invoice until January 2011, the expense would be deductible in 2011, not in 2010.
If you find yourself short of cash as the year ends but have tax deductible expenses that could be paid if you had the money, check the available balance on your credit cards. If you charge the expense on your credit card in 2010, it is counted as paid in 2010 even if you don’t pay the credit card bill until 2011. A credit card is a line of credit, debt. When you borrow money to pay deductible expenses, the timing of the deduction is when the expense is paid to the vendor, not when the debt to the creditor is paid back. Therefore, by charging deductible expense to your credit card before December 31, you can accelerate the timing of the deduction into 2010 rather than when you actually pay the bill (via paying the credit card) in 2011. This works for business expenses as well as personal deductions such as medical bills or charitable donations.
Comments