Parking card splits that cross year boundary

I think folks like R.C. can offer better insights than I (and have probably already done so). I have no tax expertise, or interest.

But the way I see the credit card charge issue raised here, is not exactly the way it has been expressed in this discussion ... significantly, I believe, because no one has noticed that not all credit cards are alike.

When you charge a purchase on a credit card issued by Master Card (for example), that purchase is paid for almost immediately by the credit card issuer. Hence, you effectively have an expense on the day of the purchase. You no longer owe the merchant anything (what you bought is paid for) ... you owe the credit card issuer ... a loan to you by the credit card issuer.

But, when you make a purchase on a merchant's credit card (a card issued by Home Depot, for example); the purchase is not paid for on the date you make the purchase ... you have taken out a loan with the merchant ... and the purchase is not paid for until you pay off that loan. My guess is that you would be entitled to treat individual payments against the loan as "expenses" ... but not the total amount of the purchase at the time of purchase.

Reply to
John Pollard
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True so far.

Sorry, you might want to research IRS Revenue Ruling 78-38. Specifically, charitable deductions made by credit card must be taken in the year the charge was made, not when the card is paid.

True. But that is defined as either when cash was paid for the parking or when the charge was made to a credit card.

Reply to
Robert Neville

John,

You're partially correct. I worked for a international card company for several years. An MC purchase is "settled" the night the merchant presents it to its bank. Your bank pays the merchant's bank and you now have an unsecured loan with your bank (that's partially why the interest rates are so high). However, most merchants these days simply offer affinity type cards with one of the major card networks. I can't remember who but HD has negotiated a deal with Citi, Chase or another major bank to process the transactions and run through the MC or Visa network. At the end of the day you still have an unsecured loan with the bank. My ConocoPhillips gas card is actually issued by Citi under license with MasterCard.

From an accounting standpoint this card is another type of prepaid asset if you operate on an accrual accounting basis. The card purchase is treated as an asset transfer on the date the transaction takes place. You credit the entire amount to cash (or AP via an invoice) and debit an asset account such as prepaid parking. When you actually use the card to park you would, on that date, credit prepaid parking and debit charitable parking or some other parking expense account. Eventually the asset account drops to zero and you buy another prepaid card. Most companies do this for items such as insurance that's paid once a year and 1/12th expensed each month.

Cash basis accounting recognizes the purchase on the date the transaction occurs. You credit cash and debit a parking expense for the entire card amount.

I doubt the IRS cares as the amounts are probably not material and you'll end up reporting the entire charitable part of the deduction at some point. I think you would want to recognize the entire purchase as soon as possible to receive the deduction benefit now rather than later. I make several charitable donations at the end of the year on credit cards and include them in that year's return even though I don't pay the bill till January.

RC, you haven't chimed in yet. Any flaws in my lengthy discourse? sb

Reply to
slb

?Hi, John.

Yes, I've been watching this thread, trying to find time to reply with more than a one-liner. The thread has wandered into several different chapters of the Accounting Theory textbook. I'll try to cover a few of them but may not get to them all.

This current sub-topic - credit card handling for a cash-basis taxpayer - reminds me of a discussion that we had here a few years ago. (Maybe you can find it in the archives.)

The crux of the matter is: To whom does the taxpayer owe the money? If I run a tab at the grocery store (not as common a situation as when I was a boy), you owe the grocer until the bill is paid; on the cash basis, you record the expense when you pay the grocer. But if you borrow $100 from the bank and use that to buy groceries, then you record the expense immediately. You do not owe the grocer for groceries; you owe the bank for a cash loan.

Nowadays, instead of borrowing the cash first and using that to buy the groceries, you are more likely to use a credit card. But you still don't owe the grocer anything; he has been paid by the credit card issuer - to whom you now owe some money. You should record the grocery purchase when you use the credit card to buy the food. Whether you pay the credit card in advance, in a lump sum when due, or in minimum monthly payments for the next

5 years - with interest - is of no concern to the grocer. You don't make those payments to buy groceries; you make them to settle your debt to the banker.

A question that I should have asked before posting my earlier reply is: From whom did jo (the OP) buy the prepaid card? I assumed (without really thinking about it) that she bought it from the parking garage operator, much like buying a gift card from Wal*Mart. That would be a purchase of an asset, from which future expenses would be paid at the times they occurred; they would be expenses at those future times. Until used, the prepaid card would be either a refundable asset or a prepaid expense; either way, it's an asset.

Which brings us to another chapter in accounting theory: Prepaid Expenses. This topic can range from very simple (insurance premiums paid in advance and charged to expense in monthly allocations) or complex (Original Issue Discount on a bond issue - but let's not get anywhere close to that issue!). The essential point is that you've paid for something in advance that you do not expect to get refunded. It's not an "asset" as we generally think of the term: we can't sell it for cash. But in accounting terms, it is an asset because it is an expense of some future period that will be carried as a "prepaid expense" until the time to account for it as a cost of doing business in that future period. If jo's parking card has no right to a refund of any unused portion, then it really is a prepaid expense. But it still is an asset, in accounting theory, so long as it benefits a future period, and becomes an expense only as it is used, or expires unused.

That last situation is kind of like giving your grocer $100 and letting him deduct future purchases from that. (Better make that $1,000 at today's prices.) If you expect any unused balance to be refunded, then it is an asset. But if any unused balance will be forfeited, it is not an asset in common usage, but still would be a prepaid expense asset on your financial statement.

But be warned: The IRS does not always agree with accounting theory. Prepaid expenses is one area where they have made some contrary rulings - and courts, including the US Supreme Court, have backed them up, generally to the taxpayer's dismay. Income collected in advance is taxable when received, even for an accrual-basis taxpayer. But expenses paid in advance are not deductible until the period when the expense event occurs. I've been retired too long to tell you the current situation, but I well remember the Supreme Court cases of AAA (American Automobile Association) on prepaid subscription income and the Schlude dance studio on prepaid dance instruction fees; those taxpayers were taxed on cash receipts that would not be earned income until some future year. But that does not mean that taxpayers who pay advance fees can deduct them in advance, even on the accrual basis.

I see that sb has posted a reply while I was typing this - and I think we are in agreement.

Jo, as Han said earlier in this thread, "Since this now is a tax question, see whether you can get it answered on misc.taxes.moderated." When you post your question there, be sure to spell out the details of the parking card: Is the card seller the same as the parking provider? Can you expect a refund of any unused amount? Does the card expire if unused?

And remember that I've been retired for a couple of decades now. Accounting theory evolves slowly, but the tax code and interpretations of it change often. So be sure to check with your own CPA on any significant tax question.

RC

Reply to
R. C. White

Then you need to move your money into a better account (Did I ever mention credit unions?) that does provide interest. (Sorry, couldn't resist.)

------------------------------------------------------------- Regards -

- Andrew

Reply to
Andrew

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