Here’s a recent story of a taxpayer that I think you will find of interest.
I have a cash-basis calendar-year client who on December 31, 2018, wrote and mailed $5,000 in checks for 2018 expenses. With this activity, his books showed a $9,000 negative cash book balance.
His December 31, 2018, bank statement shows a positive balance of $15,000.
Outstanding checks totaling $24,000 make up the difference.
The client has $50,000 available in a line of credit that he could have borrowed, but did not. His bank account does not have automatic overdraft protection.
What answers would you give to the following questions:
- Can he claim the deduction for the $5,000 of checks he wrote on December 31 and the others that were written when his books showed negative cash?
- What are the deciding factors such as the line of credit and overdraft protection?
- If overdraft-paid expenses are deductible, how do I show the result on the balance sheet in the S corporation tax return? Negative cash as asset, overdraft as liability, or increase the line of credit?
- If he can’t deduct $5,000 or, say, even $9,000, do I increase the book cash to show a zero balance and reduce expenses by $5,000?
Here’s how this works:
- If the checks are honored, the monies are deductible.
- If the checks are not paid because of insufficient funds, the courts have disallowed the expenses.