When Do I Claim Deductions? (Timing of Deductions)

One topic that’s popped up several times recently in readers emails is that of deduction timing. I thought it might make sense to knock out the three most common related questions before wrapping up tax season.

Service Performed in One Period, Payment in Another

“I had a medical procedure performed in December of 2010, but didn’t receive/pay the bill until January 2011. For the purpose of claiming this as an itemized deduction, would it count in 2010 or 2011?”

Most small businesses and darned-near every individual person are “cash basis” taxpayers. That means that:

• Income is recognized when it’s received (as opposed to when it’s earned), and
• Expenses are recognized when paid (as opposed to when the corresponding service is performed).

So for the person above, the deduction would apply to 2011 (when the payment was made) rather than 2010 (when the procedure was performed).

Related note: Income is considered to be received whenever you have “constructive receipt” of it–that is, whenever it’s made available to you without restriction. So, for example, if somebody writes you a check and hands it to you, you’ve now “constructively received” it, even if you don’t actually deposit it in your bank account until a future tax period.

Deduction for Payments by Credit Card

“I paid for a deductible expense in December 2010 using a credit card, then I paid the credit card off in February 2011. When do I claim the deduction?”

For expenses paid by credit card, the relevant date is the date of the transaction, not the date that you actually pay the credit card off.

Deduction for Computers and other Long-Lived Assets

“I purchased a computer for my business at the end of 2010, but I expect to use it for a few years. When do I claim the deduction?”

For costs that are expected to provide a benefit for greater than 12 months, the general rule is that they must be capitalized (recorded as assets) and amortized/depreciated over time.

If, however, you purchase equipment for use in a business, you can usually use the “Section 179 election” to deduct the entire cost in the year you place the equipment into service.

• Exception #1: If you’re placing a lot of equipment into service in a given year, limitations may apply. (The exact limit changes from year to year. For 2011, you don’t need to worry unless you’re placing more than $500,000 of equipment into service.)
• Exception #2: If you use the equipment partially for personal uses, you can only deduct the business-use percentage of the cost. (That is, if you use it 75% of the time for business, you can only deduct 75% of the cost.)
• Exception #2a: If the equipment is “listed property” (computers, phones, cameras, and just about anything else fun) and the business-use percentage is 50% or below, you cannot claim the Section 179 election. That is, you’ll have to depreciate the equipment over time.