Categorize and Reconcile Credit Card Payments as Transfers

Is a credit card payment an expense?

No. Each purchase on the card is booked when it is charged, to what it was for: usually an expense, but inventory is an asset until sold, and equipment is an asset unless a small-purchase rule lets you expense it (see expense or capitalize small purchases), and personal charges are not business costs. Paying the card bill only moves cash from the bank account to the card account, so it is a transfer. Booking both the purchases and the payment as expenses counts the same spending twice.

The IRS does not require particular entries. It says to use a system that clearly shows income and expenses, and these are the standard entries for a card:

This is how the books record it. Which tax year a charge is deducted in is a separate question, covered at the end.

Counting spending twice overstates expenses and understates profit. If that reaches a return, an accuracy-related penalty of 20% of the part of the underpayment due to negligence or a substantial understatement can apply.

A card case is not simple when its balance in the books has not tied to the statement for several months, there are several cards, personal and business charges share a card, or the books are behind before a return is due. If one of these fits, go to Different for you? at the end.

Gather before you start:

• Every statement for the year, for every card, including closed ones
• The bank statements that show each card payment
• Receipts and invoices
• Any rewards statement and any dispute letters

How do I categorize a credit card payment?

Record it as a transfer from the checking account to the credit card account, for the amount that left the bank. A payment has no expense category.

1. Give each card its own account in the books, a debt (liability) account. An account that already exists keeps its checked opening balance. For a new one, start at the balance owed before the first transaction you enter, normally the previous balance on the first statement you reconcile. Do not start at that statement's new balance and also enter its activity.
2. When the payment shows in the bank feed (the automatic download of bank transactions into your accounting software) or on the bank statement, record it as a transfer to that card account.
3. The same payment also shows on the card as a payment received. That is the other half of the same transfer: match it, and do not add a second entry.
4. Enter the amount actually paid. A minimum or partial payment is still a transfer, and the unpaid amount stays on the card as debt.

If the bill was paid from an account that is not the business's, it is not a transfer from checking: the other side is money the owner put in, a contribution or a loan depending on the entity. See untangling business and personal funds.

The interest on the statement was booked when it was billed, not when it is paid.

Why do my card purchases show up twice?

The same spending reaches the books by more than one route. Four causes are common:

Two signs help find the cause. A card balance in the books that climbs every month and sits far above the statement's new balance often means payments were not applied to the card account: booked as expenses, as an owner's draw, or not at all. A balance above the statement by exactly one charge often means a duplicate or a charge not yet posted. Search the card account for pairs with the same date, payee and amount, and check the category of every bank line that pays the card.

A connected feed does not prove the books are right: see why a bank feed is not a reconciliation. If the feed stopped, see when a bank feed stops importing.

How do I reconcile a credit card to the statement each month?

Put every statement line in the books once, so the card account shows the statement's new balance on the closing date, apart from listed timing items. The IRS says to reconcile the checking account each month: compare the statement to the books, enter what the books missed, correct errors, then confirm the balances agree. The card works the same way.

1. Get the statement for the period from the card issuer and keep it with the reconciliation.
2. Check that the reconciliation's starting balance (the charges and payments already matched in earlier months) equals the statement's previous balance. Timing items carried over from last month are listed apart from it. If the starting balance differs, an entry in a closed period usually changed: see a wrong beginning balance.
3. Tick every statement line against the books: purchases, payments, credits, interest and fees. Each should appear once.
4. Enter what is missing and remove duplicates.
5. Compare the books' card balance on the closing date with the statement's new balance. They should match except for timing items: a charge dated before the closing date that posted after it, or a payment the card has not yet posted. List them and check that they clear on the next statement. Any other difference is an error: find it before moving on.
6. Save the statement and mark the period reconciled.

If it does not tie, the size of the difference points to the cause:

Do not plug an unexplained gap with an adjustment entry: it hides the cause, and the difference returns next month. The monthly close around the card is in the bank feeds and reconciliation guide.

How do I book credit card interest, annual fees and late fees?

Enter interest and each fee as its own expense line, dated as the statement bills it, with the card balance going up by the same amount. Skipping them is a common reason a card balance runs below the statement and the gap grows each month.

• Interest. Publication 334 says you can generally deduct interest on debts related to your business, and a debt relates to your business when you use the money for a business expense. If a loan is part business and part personal, you must divide the interest between the two. IRS Topic 505 lists credit card interest on personal expenses as not deductible. A limit can apply to some taxpayers; Publication 334 points to the Form 8990 instructions.
• Annual and other fees. Book each to a card fees line. The test for any business expense is that it is ordinary and necessary (Publication 334), which lists bank fees but does not name card annual fees.
• Late fees. Book a late fee on its own line, apart from interest. Whether it counts as interest on the return is a tax question the cited IRS publications do not settle, so leave its classification to year end.

Do I need receipts if the card statement already shows the charge?

Generally yes: keep the receipt or invoice. A statement shows that you paid, not what for. For a credit card, Publication 583 says the statement can prove payment if it shows the amount charged, the payee's name and the transaction date. It adds that proof of payment by itself does not establish a deduction: keep sales slips and invoices showing you incurred the cost and that it was for the business.

Save each receipt to its card transaction when the charge posts. Travel, gift and vehicle costs have stricter proof rules. If receipts are already gone, or the cost is one of those, see lost receipts for business expenses.

How do I reconcile a credit card with a billing dispute or a missing statement?

Keep a disputed charge in the books as the statement shows it until the issuer posts a credit, so the card still ties. A genuine business purchase keeps its account. An unauthorized or duplicate charge is not a business cost: hold it in a separate disputed-items account, not an expense, until it is resolved. Record the credit against the account carrying the amount. A temporary credit is booked the same way, and reversed if the issuer takes it back. Deleting the charge early breaks the tie to the statement. Note the date disputed, the amount, the merchant and the issuer's reference with the reconciliation.

The dispute rules depend on the card:

• Consumer cards. Under Regulation Z, a written notice of a billing error (the regulation lists them: for example an unauthorized charge, a wrong amount, or goods not delivered as agreed) must reach the issuer, at the billing error address on the statement, within 60 days after the first statement showing the error. The issuer acknowledges it within 30 days and resolves it within 2 billing cycles, no later than 90 days. The statement may keep showing the item while stating that payment of it is not required. A quality dispute with a merchant follows a separate rule (section 1026.12(c)).
• Business cards. Credit extended primarily for a business purpose, or to anyone other than a natural person such as a corporation or LLC, is outside Regulation Z, billing error rules included, so those rights do not come from the regulation. The card agreement sets the deadline and process. Read it, and dispute promptly. Unauthorized use is the exception: the regulation's limit on a cardholder's liability for it applies to business cards too (official interpretation, comment 3-1), though an organization with 10 or more cards from one issuer can agree otherwise with the issuer.
• A personal card with business charges. The type of card decides, not the charge. The official interpretation of Regulation Z, comment 3(a)-2, says a consumer-purpose card keeps its billing error rights even for occasional business charges, and a business-purpose card does not have them for occasional personal charges. Ask the issuer which kind of card yours is.

If a dispute is still open at year end, have a CPA review how the charge is carried before the books close.

For a missing statement, get a copy from the issuer before reconciling. Reconcile to the issuer's statement, not to the feed. If statements for some months cannot be obtained, the balance has to be rebuilt from other records: see rebuilding books from bank statements.

Do credit card rewards or cash back count as income?

This is unsettled. The IRS publications and notices cited below do not say how cash back or points on a business card are treated, and the answer may depend on the program. What they do say:

• The IRS will not assert unreported income for frequent flyer miles and other in-kind promotional benefits earned through business travel, but that relief excludes benefits converted to cash (Announcement 2002-18). It does not mention card cash back.
• Other IRS material treats some rebates as a reduction of what you paid rather than income: a cash rebate from the dealer or manufacturer of an item you buy (Publication 17), and, in one private letter ruling that only the taxpayers who asked may rely on, a rebate on credit card purchases under one program. Neither settles cash back on a business card.

In the books, record cash back in its own rewards account when the issuer credits it, whether as a statement credit (the card balance goes down) or a deposit. That keeps it out of expense lines, keeps the card tied to the statement, and lets a CPA decide the treatment at year end. Keep the rewards statements.

What if business and personal charges share one card, or I have several cards?

Personal charges are not business expenses, so they have to be separated, and each card gets its own account and its own monthly reconciliation. The IRS says to keep a business checking account separate from a personal one and to keep a complete, separate set of records for each business. The same reasoning applies to cards.

• Personal charges on a business card. Do not leave them in expenses. How they are recorded depends on the entity: an owner's draw, a distribution, a loan or pay. See recording owner's draws, personal charges on company cards and untangling business and personal funds.
• Interest on a mixed card. It must be divided between business and personal use (see the interest section above). Keep the statements: the split follows how the money was used, and a CPA should work it out.
• Business costs on a personal card. See business expenses on a personal credit card.
• Several cards. Reconcile each to its own statement, including a card you closed, until its balance is zero. Cards issued to employees under one account are reconciled to that account's statement.

Example

These examples are illustrative and use US dollars.

A design LLC pays the card bill

An Austin design LLC charges US$4,000 of software, advertising and supplies to its card during the month and books each as an expense. It then pays the US$4,000 card bill from checking. The payment is recorded as a transfer: checking goes down by US$4,000 and the card balance goes down by US$4,000. Expenses stay at US$4,000, not US$8,000.

Both feeds are connected

An owner connects both the bank and the card. The card feed brings in US$6,000 of purchases, each categorized correctly. The bank feed brings in the US$6,000 payment to the card, and the owner categorizes it as office expenses. Expenses show US$12,000 for US$6,000 of spending, and the payment never reaches the card account, so the card balance in the books stays US$6,000 above the statement. Changing the bank line to a transfer to the card account clears both problems.

The balance is off by US$450

A statement shows a new balance of US$2,350, and the books show US$1,900. The difference is US$450: interest of US$150 for each of two months, and a US$150 annual fee, none of them entered. Adding the three lines as expenses raises the card balance to US$2,350, and the card reconciles.

Different for you?

• The card has not tied to its statements for several months, statements are missing, or a return is due and the books are behind: the question is whether a catch-up clean-up is needed and how each month gets closed from here. See catching up on overdue books, uncategorized expenses before tax time and the bookkeeping cleanup checklist, and get bookkeeping help.
• You have several cards, or personal and business charges are mixed: untangling them is a judgment about each charge and each entity. Start with the commingled funds guide and get bookkeeping help.
• Charges were made in late December and paid in January: which tax year a cash-method business deducts them in is a tax-timing question this guide does not settle. Ask a CPA, who can answer it from your accounting method, before relying on either date.
• Your corporation or partnership paid an owner's personal charges: the entry depends on the entity. See S corporation paying personal expenses or C corporation paying owner expenses.
• Your customers pay you by card: deposits, fees and tips are a different problem. See reconciling sales and payouts, card tips and recording refunds.