Americans paid banks $110 billion in credit card interest and fees in 2018, up 13% from the $98 billion in interest paid in 2017, and up 45% over the last five years, as Fed rate increases have been passed on to consumers. Using credit cards to cover business expenses in the dental practice is common, online purchasing is increasing with credit cards being convenient (see our Sales/Use Tax blog), and small business finds business credits cards an ally to their cash flow – when used properly.
I’ve had dentist clients, when they first joined my firm, initially recording the dental office expense deduction on the same date that they make payment on the credit card statement - which is incorrect. Per IRS regulation, the credit card charges are deductible when incurred. It makes sense to deduct it when you pay the credit card bill, but its incorrect as a cash-basis taxpayer. Think of it as a loan. You receive the deduction for the $50,000 laser when its purchased - not when the loan is paid off.
There are three reasons a dental practice should monitor this credit card payment “roulette”.
First, your overhead analysis will never be correct.
Second, vendor payment analysis will never be correct.
Lastly, you may not be maximizing your tax benefits.
Your business credit card cycle likely ends mid-month, on the 10th for example. For every credit card charge after the 10th, that will likely be paid 45 days later. That charge will appear on the credit card cycle that ends 30 days, to be due 2-4 weeks after that. If you incorrectly recorded the deductions when the statement was paid, this would render any analysis of your overhead useless – particularly if those credit charges are growing. Each individual transaction should be recorded and deducted on the same day. Someone once reminded me that 50% overhead is achieved by 10 basis points at a time, little by little, and you got to measure it to change it.
Most of the time, I see similar transactions simply booked to one account. All the marketing expenses (or dental supplies or meals & entertainment) will be lumped into one amount for all transactions on a credit card statement. For example, there could be 5 different marketing companies composing the $3,000 of charges – website, SEO, local baseball team, Demandforce, on and on. The problem with this method is you cannot readily track how much you have paid a specific vendor and renders your marketing effectiveness analysis useless. How will you decide which marketing dollars are effective – per new patient - if you cannot track where the marketing money is going?
Maybe you stocked up on supplies at year end, on December 20th for this illustration. If your credit card cycle ends mid-month, those year-end extra expenses will not be recorded in books until late January or early February when the credit card statement is received and paid. This means you stocked up for those extra tax deductions at year end for zero real benefit.
As the dental industry is rapidly changing and consolidating, it’s moving towards more large organizations paying close attention to reducing operational cost and efficiency. The independent practice owner must pay attention to all the financial “little things” more than ever to maintain their own efficiency and practice success.