We are not all blessed with perfect credit. In fact, in today’s economy, people who used to pride themselves on their perfect credit are devastated when they witness the destruction of their finances and their credit score. But life must go on. What do you do?
Over the years, I’ve worked with people who’ve experienced financial ruin, but who held on, ultimately recovering their small business by paying business expenses with a partner’s credit card.
This business practice is similar to asking a family member to co-sign a loan for you, and it comes with the same guidelines. When someone trusts you enough to share business expenses and a credit card, don’t abuse that kindness. Pay all the bills—and don’t buy things you cannot afford.
Handling an audit when using someone else’s credit
Have you ever noticed that people with financial misfortunes in one area often find themselves also facing tax audits? There are records you want to have on hand if and when an audit comes.
1. Keep a copy of every credit card statement.
2. Keep a copy of the charge slips related to the business expenses you plan to deduct, especially where the slips include an itemized list of the items that you’ve purchased.
3. Keep a copy of the proof that you paid the statement.
- Often when you’re using someone else’s credit card, you don’t have a bank account of your own either, and you may need to pay by money order. If this is the case, be prepared to show that you are the purchaser of the money order as well as where the funds came from to buy it.
4. Make the payments directly to the credit card company, if possible, rather than to your friend. Your friend doesn’t need the headaches resulting from strange deposits. He or she would just have to prove these deposits are not income.
5. Deduct only as much of the bill as you actually paid.
- Since this is not your credit card, you may not deduct all the charges that appear—even if you were the one who made the purchases—unless you pay in full.
- When you only pay part of the balance due, circle the expenses your payment covers. Don’t just pay a round number like $500, pay the exact amount, such as $493.22—the total of specific, identified expenses.
6. Get a letter from your friend or business partner (for each year that you’re using his or her card) stating that you were given permission to use that card and that you have, indeed, been the one to make all the payments.
7. Advise your friend to be sure not to use the same expenses on his or her tax return.
During an audit, the hardest job is to get someone else’s prior year credit card records. By the time the audit happens, at least two or three years will have passed. (You file the tax return one year after the charges, and the IRS audits within three years.) By then, your friend or business partner may have moved, gotten divorced, or even died, alas. Or he or she may not be talking to you at all because you didn’t make all the payments.
It’s so much easier to get all the records in order as you’re going along. You’ve been doing this for the last couple of years? It’s time to reconstruct the records now, while you’re thinking about it.
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.