Rules to Follow With Business Credit Card Charges

November 5th, 2015 at 11:23 AM

Do you use a business  credit or debit card for some corporate expenses? Most of my clients do for travel entertainment, vehicle expenses, etc.

Regardless of how you operate as a sole proprietor or corporation for tax purposes, you need to properly document each and every business deduction. The credit or debit card only provides proof of payment; that’s it–the IRS says you need further documentation or the entire expense will be disallowed–and possibly taxable income to you, personally!

Therefore, in addition to the credit card statement, you need a DETAILED receipt, including exactly what you paid for–such as a restaurant receipt itemizing the dinners, food, and drink.

Corporation: Double Jeopardy

As a corporation owner, you are considered an employee of the company. This requires the need for a tax-law-defined accountable plan; this is a reimbursement arrangement requiring 3 specific elements.

  1. Expenses must have a business connection.
  2. You must substantiate the expense as required by tax law–mileage log or for entertainment who,where.why, details.
  3. You must return any excess allowance to the corporation–these are amounts NOT substantiated.

If you do not meet these requirements, the corporation needs to put a dollar value of your failures to document on your W-2; if not done timely, you face payroll tax penalties. Ouch!!

Therefore, regardless of your form of entity, get in the habit of documenting your business expenses.

I provide sample accountable plans to clients upon request.

Are you overpaying your taxes?
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