Cash Overdraft Treatment For Tax Purposes

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:

1. 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?

2. What are the deciding factors such as the line of credit and overdraft protection?

3. 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?

4. 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:

1. If the checks are honored, the monies are deductible.

2. If the checks are not paid because of insufficient funds, the courts have disallowed the expenses.

In the S corporation balance sheet, use zero for cash and report the overdraft in the current liabilities section and title it “cash overdraft” or “checks written in excess of cash balance.”

There’s no room for this title on the 1120S tax return balance sheet, so label it in a statement attached to the return.

I found this interesting and thought you would, too.

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