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I have a C Corp. I operate on a Cash basis. I lent my company

$30,000 two years ago. Now...
I have a C Corp. I operate on a Cash basis. I lent my company $30,000 two years ago. Now I am repaying myself. Two years ago my new accountant told me to report all my credit card balances at the end of my fiscal year. Both of these items I noticed are referred to liabilities. Even though I pay these off when I get cash. Now I noticed that even though I paid the card the month following the end of my tax year, the Amount I paid not not reflected in my expense account. Even though my Cash balance is reduced, the amounts I paid back to myself and on the credit card are reflected as income on my balance sheet. Since I am not an accountant, I am confused about all of this. I did not have this issue with my credit card before when the balances were not reported.
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Answered in 6 minutes by:
8/19/2013
USTaxAdvising
Category: Tax
Satisfied Customers: 1,237
Experience: US Taxation specialist.
Verified

Hello,

Thank you for using justanswer. I can assist you with your questions today.

 

I have a couple of questions which will help me provide thorough answers.

 

1. Are the credit cards being used for personal or business expenses?

 

2. When you say "reflected as income" on the balance sheet - do you mean that the payments you make on the credit cards are being recorded as "income" for the C-corp or is it being recorded as "income" to you the shareholder?

 

If you can get back to me on these I can do my best to help.

 

Best regards,

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Customer reply replied 4 years ago

1. Credit Cards used for Business


2. Income to the C Corp


 


I thought that since I am paying the credit card the next month, all the related expenses would be recorded as expenses. The liability balance reduced, but it's not recorded as an expense.


 

Customer reply replied 4 years ago

1. Credit Cards used for Business


 


2. Income to the C Corp


 


 


I thought that since I am paying the credit card the next month, all the related expenses would be recorded as expenses. The liability balance reduced, but it's not recorded as an expense.

Hello Ali,

 

Yes you are correct. When you pay for business expenses with your credit card the entry would be:

 

DR Business Expenses XXXX

CR Credit Card liability account XXXX

 

When you make payments on the credit card the entry would be:

DR Credit Card liability account XXXX

CR Cash XXXXX

 

There should be no entries to revenue or income so something is wrong. You will need to review the entries for the year to ensure the credit card payments are reducing cash and not increasing revenue.

 

Please let me know if you have any further questions on this.

 

Best regards,

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Customer reply replied 4 years ago

Okay, I am not sure if I am right. but I think if my company was on the Accrual Basis, all the credit card purchases that DR Business expenses would have been reflected in my Tax Year Expenses, so paying it this year would have just reduced the liability, but not affect the revenue because those expenses would have already been accounted for the previous year.

However, with the cash basis, only what is paid CASH is reported.

I believe since I am paying off the cards when money comes in, I should NOT have included the credit card liability on my returns, because they were not paid for yet?

 

Also, what about the loan the company is repaying me? will my company pay taxes on this or is it tax exempt since it was loaned by me to the company?

Hello Ali,

 

When you use a credit card for business expenses they are deductible when incurred for cash basis taxpayers.

 

I believe since I am paying off the cards when money comes in, I should NOT have included the credit card liability on my returns, because they were not paid for yet? - No this is not correct, the liability should be on your return because you owe the credit card company. This is a real liability and not an accrued liability. Note that if you did not use the credit card you would have used cash you are merely using a different form of cash that does not require payment from you until a further date (although you are liable for the debt).

 

Also, what about the loan the company is repaying me? will my company pay taxes on this or is it tax exempt since it was loaned by me to the company? - The loan the company is repaying you could be taxable. If the amount is in excess of 10K then you should be charging the C-corp interest on the loan at the applicable federal rate "AFR" for the year. See link here for the AFR rate for 2012 - www.irs.gov/pub/irs-drop/rr-12-31.pdf‎

If the amount is less than 10K then it is deemed de minimus and interest is not required to be imputed.

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Customer reply replied 4 years ago

Going back to my initial question, with regards XXXXX XXXXX Credit Card.


When I make these payments, the liability is reduced, cash is reduced, but my net income is not reduced on the current statement.


 


On my last tax return, the items purchased on the credit card, were not reflected in my expenses. So I am confused, that I am now paying on liability was not expensed.

Hi Ali,

 

When I make these payments, the liability is reduced, cash is reduced, but my net income is not reduced on the current statement - this is correct. The expenses are already recorded on the income statement when you make the credit card transactions. The payments made on the credit card do not hit the income statement, they would hit the balance sheet. Both of these accounts are balance sheet accounts.

DR Business Expenses XXXX

CR Credit Card liability account XXXX

 

On my last tax return, the items purchased on the credit card, were not reflected in my expenses. So I am confused, that I am now paying on liability was not expensed. - I believe the credit card expenses were being expensed on the income statement. How else would the credit card liability be on the balance sheet? You need a debit somewhere to make a credit on the balance sheet. You could review your records to ensure that the expenses are in fact hitting your income statement but I am quite certain they are.

Note that there will be a timing difference between actual cash paid for the credit card balance and the actual credit card transactions. The credit card transactions are deductible in the year made. The payments on the credit card have no effect on the income statement, it merely a balance sheet entry, no income tax effect.

 

I hope this helps make it more clear, please let me know if you have any further questions.

 

Best regards,

 

USTaxAdvising
Category: Tax
Satisfied Customers: 1,237
Experience: US Taxation specialist.
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