Whether you own a business or not, you’ve probably wondered about the tax-deductibility of credit card fees. It’s a subject that comes up at nearly every corporate taxation conference, personal finance seminar, and budgeting webinar. Why is this seemingly arcane topic of such high interest to so many people? One reason, and one reason only: money. That’s right, individuals and entrepreneurs stand to pay a much lower amount of taxes if they can deduct every credit card fee they’ve incurred in a given year.
But, the bit question remains? Are CC fees and finance charges, as well as debit card processing fees, tax-deductible. The answer is a resounding, “Yes and no.” That’s because the real answer wholly depends on whether you are filing an individual or company tax return. In other words, the Internal Revenue Service allows the deduction for one but not for the other. Here’s how the system works, and what every business owner and individual filer should know about credit and debit card fees and finance charges.
For Business Owners
The bottom line for entrepreneurs is this: yes, you can deduct all “business-related” credit card fees, miscellaneous charges, expenses, and finance charges. That means the card itself need not be a business credit card or business debit card, though that is preferable for organizational reasons. However, if you keep good paperwork, you’re okay in the eyes of the IRS as long as the charges are directly connected to your business.
The question of where, on the tax form, to record the deduction is another question. For those who use a Schedule C, the line item is called “Miscellaneous expenses.” Simply tally us all your CC expenses for the year and put the total in that category. If you are a corporation or LLC, it depends which form you are required to fill out, but the category is typically called the same thing and goes along with your other business deductions.
Deductions and Credits are NOT the Same Thing
In general, business owners can deduct any expense they incur for operating their enterprise. The IRS demands two things in most every case: documentation and relevance, by which they mean that the expense must be related to the business and not your personal finances. Note also that deductions are not credits.
For example, if you have $1,000 in credit card fees to deduct, you subtract that amount, along with your other deductions, from your business income and then figure the tax. That’s why the resulting amount, after deductions, if called “taxable income.” Tax credits work another way; they are special allowances that let individuals or business owners directly subtract a certain amount of money from the final tax bill. Be careful not to confuse the two.
On the bright side for business owners, it is possible to deduct almost all expenses that are related to earning a profit. Some of the most popular line-item deductions for entrepreneurs include:
- Advertising and marketing costs
- Cleaning services
- Insurance for the company
- Equipment, like computers and copy machines
- Accounting services
- Vehicles used exclusively for company work
Unfortunately, individual taxpayers don’t get the same breaks as businesses do. When it comes to personal deductions, there are literally hundreds of items that are allowable, like certain medical and educational expenses. However, credit card fees, charges, and interest are not among them. Even debit card fees and charges are off limits for individual taxpayers. What IS okay for filers to deduct? Here are some common examples:
- Interest on student loans
- Losses on investments
- Taxes paid to local and state government entities
- Contributions to charities
- IRA and 401k contributions
As is the case with businesses, individuals need to remember that credits and deductions are not the same. Credits are usually a much better deal for taxpayers because the amount is directly subtracted from the “bottom line” tax owed. Deductions merely reduce income before the tax amount is calculated.
Further, individuals who choose to take the so-called “standard deduction” cannot use any itemized deductions. That’s why it’s usually a good idea to hire a tax pro, like a Certified Public Accountant, to prepare your return. An expert can figure out whether it’s better to use the standardized deduction or take all the separate deductions together.
Key Points to Remember
Any business owner or individual getting ready to file annual or quarterly tax returns should keep the following key concepts in mind:
- Self-employed persons who run a business out of their homes or a small office can deduct fees associated with the use of business credit cards, like processing fees, finance charges, and annual fees.
- If your business spends a specific dollar amount an a qualified expense, like advertising, and uses a CC to make the payment, it’s important to break out the cost for the advertising and the separate finance charges when filling out tax forms.
- If you use your business card for personal expenses, you are inviting trouble. The IRS frowns on the practice and you’ll need even more documentation to prove that the charge was business-related. Then, you’ll need to figure the exact finance charges related to the expense in order to add that amount to your other CC-related processing and other fees/charges.
- Use an accounting app to keep track of all payment processing fees throughout the year. Many business owners have to file quarterly returns, and it’s essential to get the cut-off dates for payment processing fees right. You don’t want to deduct a fee, for example, from this quarter’s income when it was charged against last quarter’s income.
- Deductions do not directly affect the amount of tax you pay as a business entity. They only reduce your income, and subsequently lead to a lower overall tax bill.
- Don’t use personal credit cards for business expenses. It’s better to use cash or a check than to use a personal CC for company-related transactions. That’s because it’s a hassle to separate the related finance charges and attribute them to your miscellaneous deductions on a Schedule C. If you’re in a jam and don’t have your business CC with you, but must pay for a business-related item, use cash or a check and be sure to get a receipt.
- If you are larger than a one-person business, it’s highly advisable to hire a CPA or tax attorney for preparation of yearly or quarterly returns. Tax laws and regulations are complex, and unless you know the territory well, it’s easy to make a costly mistake. Professional preparers are registered with the IRS and have ID numbers to prove that they have been vetted by the government, even if they are not CPAs or attorneys.
Payment processing fees on business credit cards can add up to a substantial amount in a normal year. That’s why it’s imperative to keep accurate records, make sure never to use your business cards for personal purchases, and never to use personal cards for business purchases. This form of “mixing” personal and company credit cards only leads to confusion and, in the end, will mean spending much more time preparing your tax return.