“And Other Mistaken Beliefs about Credit Card Statements and Taxes”

Credit card statements are necessary to prepare your taxes. They have a record of items that were purchased with the credit card some of which may be tax deductible on your tax returns. These statements, however, are being given credit for bearing far more weight than they actually can carry

1. There is a notion that all you need for an audit is a credit card statement. According to this theory, no other receipt is necessary. This belief may not be true. I want to be perfectly clear: credit cards are not necessarily accepted as receipts. At an audit, one should provide two sides for most deductible expense transactions: a) record of payment and b) receipt for payment. A credit card statement is the record of payment only. Generally, you should also have a receipt. Some time ago one of my clients got audited. Her father is an attorney. He counseled her that all she had to do was present her credit card statements and those would serve as receipts. She called to tell me that I was wrong about credit card statements not being receipts. After all, her father was an attorney. I asked if her father was a tax attorney. The answer was that he wasn’t. I told her that she had her choice: she could decide on her own what she wanted to do but I explained that logically a credit card statement couldn’t explain what each entry represented. A receipt was needed to give the details of the purchase. For instance, one could buy something at a store that was tax deductible or buy something that wasn’t. Without a receipt you couldn’t show the detail that would prove what the item was. She chose to do what I said which was to provide the receipts along with the credit card statements. Her audit went well. At the end she asked the agent what would have happened if she had only provided credit card statements. The agent said that all of her deductions would have been denied.
2. There is a belief that you deduct your purchases as your pay off your credit card: This belief is incorrect. When you put a purchase on a credit card, the date you put it on it counts as the date of purchase. In essence you’ve taken a loan from the credit card company. As such for purposes of recording the transaction for tax purposes (for most taxpayers who are on the cash basis), the date you put this purchase on your credit card counts as the date you record it for tax purposes. Whether you pay the full amount of the purchase that month or not doesn’t matter. The full amount of the purchase is reflected on the date of the purchase and thus will be included in the year of the purchase.
3. There is the idea that the way the credit cards organize your purchases on credit card statements is sufficient for doing your taxes. Many people would like organizing for taxes to have been done by the credit card company and so that they do not have to do any work. Unfortunately this isn’t true for many of the entries. Let’s look at some examples (and I’m using my credit card for the purpose giving examples; yours may be different): I changed some money abroad. The money changed was characterized as “other services”. If this item were included in “legal and professional services” on the tax return, it could well be wrong. If the money was spent on food while away on a business trip, the exact amount would have to be entered under “meals and entertainment” or if on other travel expenses, it should go on “travel”. One wouldn’t use the total amount. Another example is that I renewed the service coverage for a computer. It was characterized as “merchandise”. It is not merchandise. It’s a service contract and should get characterized as such.Unfortunately, one can’t rely on credit card statements to do the bookkeeping work that being in business requires. Each entry on a credit card statement should be entered on a software program such as QuickBooks or on Excel into the categories that are relevant for your business. You can use the expense list categories given elsewhere on this website for your organizational purposes.