Are Business Credit Card Interest Charges and Fees Tax-Deductible?
The short answer:
But as is the case with just about everything connected with income taxes, whether business or personal, there are always exceptions.
In general, you can expect to be able to write off credit card interest charges and fees as long as they are incurred for business purposes.
The IRS Definition of a Business Expense
The IRS does have specific definitions of business expenses.
To be deductible, a business expense must be ordinary and necessary in the operation of your business.
To be considered an ordinary expense, it must be one that is both common and accepted in your industry.
For example, if you are running a business as a painting contractor, the purchase of both paint and drop cloths would be considered ordinary for that industry. However, the purchase of gym equipment wouldn’t be.
To be considered necessary, it must be needed in the conduct of your business.
Continuing the painting contractor example, the purchase of paint brushes and paint spray equipment would be considered necessary to the operation of the business. However, purchasing a lawnmower probably wouldn’t be.
It’s also important to understand that an expense doesn’t need to be indispensable to be considered necessary. There are many types of expenses that are fully deductible that may be desirable, but not absolutely necessary.
In the case of credit card interest charges and fees, the expenses may be considered necessary if they are used for the purchase of supplies and services needed to conduct your business.
Business Credit Card Interest Charges
For the most part, any interest incurred in the acquisition of products, inventory, or services needed in the conduct of your business can be tax-deductible.
If you are using a credit card to make business-related purchases, the interest will be deductible, subject to the limits in the next section.
But when it comes to credit cards, there can be an additional complication, and that’s personal use.
The cleanest and most defensible way to deduct business credit card interest charges is to have a credit card in the name of your business.
As long as all interest incurred on that card is connected with the purchase of business-related expenses, the interest will be fully deductible.
Alternatively, you can also have a credit card that’s in your name personally (which will be the case with small business owners more often than not).
You can use that card strictly in connection with your business, in which case all interest charges will be tax-deductible.
But where tax-deductibility of credit card usage gets messy is when you use a credit card for both business and personal expenses.
The interest on business-related purchases charged on the card can be taken as a business expense. However, it can be an accounting nightmare to break out interest accrued on business expenses versus personal ones.
Whether you use a credit card in the name of your business or a personal card, the best strategy is to dedicate the card exclusively to business purchases. If you do, you’ll be able to take 100% of the interest charges on your credit card as a business expense.
It’s worth noting that interest accrued on personal credit card charges is not deductible either as a business expense or as a personal one on your 1040 schedule A.
Business interest limitation
Even where a business is concerned, there is a limit to how much interest you can deduct.
According to the IRS, the interest expense limitation is the sum of the following:
- Business interest income,
- 30% of the adjustable taxable income, and
- Floor plan financing interest (interest on a revolving line of credit to obtain financing for retail goods, such as inventory).
What’s equally important to understand is that the above limitation applies to the total interest expense incurred by your business.
That includes credit card interest, but also interest paid on other types of financing arrangements, such as automobiles, business equipment, and inventory.
If you have any doubts about this calculation, or believe you may be at risk of exceeding the limit, be sure to consult with a tax professional.
Deducting excessive interest expense could trigger questions from the IRS.
Business Credit Card Fees
Just like personal credit cards, business cards come with fees. Just like interest paid on a business credit card, those fees are also deductible for business purposes.
Common examples of tax-deductible business credit card fees include:
If your credit card has an annual fee, which is commonly $95 though it can be higher, it’s a permitted business deduction.
Surprisingly, late fees are also tax-deductible for business purposes. However, you’ll want to make sure it doesn’t happen too often. The IRS has specific estimates for virtually all types of deductions, and any that appear excessive could be a red flag for an audit.
Cash advance fees
These are also generally deductible, but just as the case with late fees, they shouldn’t be excessive.
Balance transfer fees
These are generally deductible, but there may be limits. Since they represent fees in connection with the refinance of existing debt, they may need to be capitalized and deducted over several years. This is certainly a possibility with a large transfer involving fees of several hundred dollars. Be sure to consult your tax advisor if this describes your situation.
Some vendors and merchants may charge an additional fee if you pay using a credit card. This is typically to cover the swipe fee credit card companies charge to merchants.
Just as in the case with business credit card interest charges, business credit card fees may also have limited deductibility if you also use your card for personal use.
And once again, it can be a real nightmare breaking out the allocation at the end of the business year.
How Accounting Methods Impact Tax-Deductibility
Businesses typically use one of two accounting methods for both financial reporting and filing income tax returns.
Each has to do with the timing of financial transactions, whether they relate to income or expenses.
The most common is the cash method. Basically, under this method, income is recognized when it is received, while expenses are recognized when paid.
For example, let’s say you made a sale on December 26, but you didn’t receive payment from the customer until January 2. If you’re a cash basis tax filer, you’ll record the income as having been received on January 2, which moves the income into the new year. This is despite the fact that the sale of the item, including delivery, occurred in the previous month and year.
The same is true of expenses for a cash basis business. For example, let’s say you receive a bill for inventory with the due date of January 15. If you pay the invoice on December 29, it will be included in the year when you made the payment – not when the bill is actually due.
The second method is the accrual basis. It works just the opposite of the cash basis. Income is recognized when earned – not received – and expenses are recognized when incurred, not paid.
For example, if you make a sale on December 15, you’ll include the income from that sale as of that date, and for that calendar year. It doesn’t matter that the customer doesn’t pay your invoice until January 10. The income was earned in the previous month and year, and that’s when it will be included for tax purposes.
On the expense side, let’s say you had a bill that’s due on December 20, but you don’t pay it until January 5. You’ll still include the expense for December, even though you won’t make payment until the following month.
Cash vs. Accrual
This topic is especially relevant when it comes to credit cards, since you usually pay this month’s credit card bill next month.
If you’re a cash basis taxpayer, you can deduct only the credit card interest and fees actually paid during the tax year.
This may not match what appears on the year-end statement you receive from the credit card issuer.
That figure will include the interest the credit card issuer is recognizing for the calendar year.
But since you won’t pay your December bill until January of the following year, you’ll only include the expenses for the months you make payments for.
To give an example, you’ll pay your December, 2019 credit card bill in January, 2020. At the opposite end of the year, you’ll pay your December, 2020 credit card bill in January, 2021.
If you’re an accrual basis taxpayer, you’ll recognize interest and fees as they are incurred, not when you actually pay the credit card bill that reflects those charges.
When in Doubt Consult a Tax Professional
As you can see, though credit card interest charges and fees are a relatively simple concept on a personal level, they can get significantly more complicated for business purposes.
This is especially true when it comes to the difference between cash basis and accrual basis accounting and tax reporting methods.
If you make significant use of credit cards in conducting your business, and you have expenses for both interest and other credit card fees, consult a tax professional if you have any doubts about how to handle it for tax purposes.