Taxes can be incredibly complicated. We all understand that it is the law to pay the IRS the tax we owe, and it’s perfectly reasonable for a business to want to pay as little tax as possible.
So, when it comes to credit card fees – are they tax deductible for your business?
Read on, as we explain in detail the rules regarding deductible taxes from credit card fees.
The basic answer is yes, credit card fees are tax deductible for businesses but the important part of this is what the credit card was used for. Personal use and business expenses such as payroll are completely different things, so it’s important that we understand what is what before we attempt to reclaim some of the tax.
Deductions By An Individual
The TCJA (Tax Cuts and Jobs Act) took effect in 2018 after former President Donald Trump signed it into law in 2017. This completely altered the way we understood and dealt with certain aspects of taxation in three decades.
For individuals, this eliminated various itemized deductions that we had paid for previously. It also removed the expenses such as vehicle costs that individuals used for the needs of their businesses. In brief, the TCJA added more potential deductions for the US taxpayer.
However, fees for the use of credit cards were never tax deductible for itemized deduction – but before the TCJA, individual tax-payers could deduct costs from transactions for both credit and debit card usage made to the IRS.
Deductions By A Business
Almost all credit card fees or charges made by a credit card company for a transaction is entirely eligible for tax deduction, as it falls under the remit of a business expense.
It will depend on what sort of business you’re involved in as to the process. A corporation will file form 1120 whereas any other business files a schedule C. Regardless of the type of business, they are entitled to reclaim expenses throughout the year for this type of charge or fee.
These charges can include:
- Annual fee
- Monthly fee
- Late fee
It may seem obvious, but to reclaim these expenses – they must be for the purposes of the business, such as the purchase of products. Any processing fees incurred via the credit card can also be reclaimed.
What’s more, a business can reclaim expenses that are incurred due to their acceptance of credit cards. So, if you’re acting as a merchant and you accept credit cards as a method of payment, you can reclaim the charges made (normally flat fees) for the convenience of its usage.
These will all be listed as business expenses and will all be eligible for tax deductions.
If a small business is conducting their taxes correctly, they will notice plenty of opportunity for deductions and therefore the ability to recoup some of their money. The IRS has made it clear that deductions can include any expense incurred that are described as necessary or ordinary.
Does It Matter If It Is A Business Credit Card Or Not?
This is a good question, as some businesses believe that they will require a business credit card to reclaim credit card fees for their business. The short of it is, you don’t need a dedicated business credit card to recoup any of the deductible expenses you are entitled to.
Having said that, there are plenty of advantages for having a business specific credit card. Not only does it make things easier when it comes to doing your taxes and other business related administration and finance, but it also makes it far simpler to do so and not be caught out.
Remember, deducting personal expenses and claiming them to be a business expense is against the law and an extremely serious offense – and committing this accidentally or purposely is no defence in law.
So, it’s always a good idea to completely separate your business world from your personal world.
Another point for this is that interest incurred on a business credit card is deductible – trying to analyze the eligible interest on a personal credit card could be a nightmare.
A final advantage to having a business credit card specifically is due to many advantages you could gain from the card. These advantages could include:
- Far higher credit limits than personal credit cards
- Travel rewards
- Cash-back advantages
- Air miles
- Hotel points
- A reduction in personal liability
- Boosts the business’s credit rating
There are however, some disadvantages to opting for a business credit card. These can include things like:
- Expense: Although fees can be tax deductible, it may be easy to rack up huge business expenses, particularly if fees aren’t paid on time.
- Security: It’s likely to be easier than your personal credit card for employees or shareholders to steal and misuse your credit card information.
- Protection: Often, small business credit cards can offer less protection like disputes when it comes to bills or transactions.
- Wild interest rates: Unlike a loan, a business credit card can have a variable interest rate and it may be much more difficult to transfer a balance to another business credit card. If your lender alters their interest rate, which could happen annually, you may end up paying far more than anticipated and find some serious expenses required to rectify the situation.
The Important Take-Aways
The important thing to remember is that, yes, credit card fees are tax deductible for businesses but you’ll need to be sure that the expense is ordinary or necessary. If you are claiming an expense to be ordinary, you’d have to think carefully about this.
For example, a mechanic might claim expenses for vehicle related tools and equipment but wouldn’t be able to claim relief for something like a deep-fat-fryer as it isn’t a usual expense for this type of business. a
If you’re claiming a necessary need to the business, you’d also need to provide evidence of this. To keep a business operational, it is deemed necessary for credit card fees, so long as they are used for business essentials.