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Are Business Credit Card Taxes & Their Interest Deductible?

Are Business Credit Card Taxes &  Their Interest Deductible?

Yes!!! But, as with almost everything related to income tax, whether business or personal, there are always exceptions.

In general, you will be able to waive credit card charges and interest rates as long as they are incurred for business purposes.

IRS definition of a business expense

The IRS has specific definitions of business expenses. To be deductible, a business expense must be normal and necessary for the operation of your business. To be considered an ordinary expense, it must be a regular expense and accepted in your industry.

For example, if you run a business like a gym center, purchasing fitness equipment would be considered normal for the industry. However, the purchase of fitness farm products would not be.

To be considered necessary, it must be needed in the management of your business. To use the example of the gym center, the purchase of dumbbell equipment would be considered necessary for the operation of the business. However, buying a lawnmower probably wouldn't.

It is also important to understand that an expense does not have to be essential to be considered necessary. Many types of expenses are fully deductible and may be desirable but not necessary.

For credit card expenses and interest rates, fees may be considered necessary when used to purchase the goods and services necessary to run your business.

Business credit card interest charges

Most of the time, any interest you have in purchasing the products, inventory, or services that you need to run your business can be deducted from taxes.

If you use a credit card for business purchases, 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 is personal use.

The easiest, most affordable way to deduct interest from a business credit card is to have a credit card in the name of the business.

As long as all interest incurred on such a card relates to the purchase of business expenses, the interest will be fully deductible. Alternatively, you can have a credit card in your name (which will happen to most small business owners).

You may use this card strictly for your business; In this case, all interest charges will be tax-deductible.

But where the tax deductibility of a credit card becomes difficult is when a credit card is used for personal and business expenses. For example, interest on business purchases charged to your card may be considered a business expense. However, it can be an accounting nightmare to divide accrued interest into business and personal expenses.

Whether you use a credit card in your business name or a personal card, the best strategy is to dedicate the card exclusively to business purchases. If you do this, you can treat 100% of the interest charged on your credit card as a business expense.

It is important to note that interest accrued on personal credit card charges is not deductible as a business or personal expense in the 1040A Schedule A.

Limitation of Business Interests

Even for a business, there is a limit to the amount of interest you can deduct.

According to the IRS, the interest charge limit is the sum of the following:

  • The interest income of the company,

  • 30% of revisable taxable income, 

  • Floor plan finance interest (interest on a revolving line of credit to obtain financing for retail products, such as inventory).

Equally important to understand is that the above limitation applies to your business's total interest expense.

This includes interest in credit cards and interest paid on other financial arrangements, such as cars, business equipment, and inventory.

If you have questions about this calculation or think you are exceeding the limit, consult an accountant. Deducting excessive interest charges can raise questions from the IRS.

Business credit cards fees

Like personal credit cards, business cards are chargeable. However, like interest paid on a business credit card, these fees are also deductible for business purposes.

Here are some common examples of tax-deductible business credit card fees:

Annual Fee: If your credit card has an annual fee, which is typically $95, although it may be higher, this is a permitted business deduction.

Late Fees: Surprisingly, late fees are also deductible for business purposes. However, it would be best if you made sure that this doesn't happen too often. The IRS has specific estimates for virtually all types of deductions, and anything that seems excessive can be a red flag for an audit.

  • Balance transfer fees: They are generally deductible, but there may be limits. As they represent costs associated with refinancing existing debt, it may be necessary to capitalize and deduct over several years. This is certainly a possibility with a large transfer involving a fee of several hundred dollars. Check with your tax advisor if this describes your situation.

  • Cash advance fees: They are usually deductible as well, but like late fees, they should not be excessive.

  • Convenience fees: Some sellers and merchants may charge additional fees if you pay by credit card. This is typically used to cover swipe fees that credit card companies charge merchants.

  • Just like the interest charges for your business credit card, your business credit card charges may also have limited deductibility if you also use the card for personal purposes. And, again, it can be a real nightmare breaking out the allocation at the end of the business year.

If in doubt, consult a tax expert.

As you can see, although interest and credit card fees are a relatively simple concept on a personal level, they can be significantly complicated for business purposes.

If you use a lot of credit cards to run your business and have interest and other charges on your credit card, consult an accountant like DENNIS JAO if you are unsure how to manage them for tax purposes.



Dennis Jao
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