Credit card fees can be a pain, but the good news is that if they're for a business, they're tax-deductible. Those credit-card-related charges include interest expenses, balance transfer charges, cash advance fees and credit card processing fees.
Credit card fees explained
Credit card companies charge all kinds of fees for both business and personal cards, including the following:
- Annual fees
- Late fees
- Interest costs
- Balance transfer costs
- Cash advance fees
Some of these fees, such as annual fees, are charged regularly, regardless of whether you use your card. Others apply only if you use your card for certain actions, like a cash advance or a balance transfer. These fees vary by card. For example, some cards don't charge an annual fee, while others charge hundreds of dollars per year. [Read related article: Guide to Choosing a Business Credit Card]
In addition to the normal retail fees that credit card companies charge for having or using a card, they require businesses that accept credit cards as a form of payment from their customers to pay processing fees on every credit card transaction they accept. These fees are usually a few cents per transaction, plus a small percentage of the sale amount.
In exchange for these processing fees, credit card companies accept liability if it turns out that the business's customer is using a card fraudulently or tries to back out of the transaction later.
Who can deduct credit card fees?
Any business can deduct credit card fees on their taxes. The form you use depends on your business structure.
- For incorporated entities, such as limited liability companies (LLCs) filing as a C-corp, this is done using Form 1120. Those filing as an S-corp use Form 1120-S
- Partnerships file using Form 1065.
- Unincorporated business owners (sole proprietors) and single-owned LLCs can also deduct credit card fees that are qualifying business expenses using Form 1040 Schedule C.
To do so, you must be able to show that the fee was unequivocally a business expense. In other words, if you use your personal credit card to buy gas once a year for a business vehicle, you don't get to deduct the entire annual fee for your card. This is why business owners should set up dedicated business bank accounts and credit cards to clearly separate business and personal expenses and make both types easy to track.
There's also another big reason for businesses to keep separate financials: Mingling business and personal money can cause business owners to give up liability protections afforded to incorporated entities such as LLCs. In these cases, courts may be able to "pierce the veil" and hold a business's directors and shareholders personally liable for damages caused by the business.
Business vs. personal credit card fees
Though credit card companies charge fees for both business and personal credit cards, only businesses can deduct credit card fees. Further, fees claimed by businesses as deductible business expenses must be directly associated with the business.
These requirements are significant because business owners often use their personal credit cards to cover business expenses. In other cases, they use business cards for personal expenses. Both actions can make it more difficult to deduct credit card fees, because expenses have to be directly related to business (and only business). [Read related article: How to Apply for a Business Credit Card]
Business deductions for credit card fees
According to IRS Publication 535, businesses can deduct 100% of credit card expenses used only for business. If a business owner uses a personal credit card for business purposes and is assessed a fee, they can deduct only a percentage of the fee equal to the percentage of card spending that's for business (i.e., the fees that are directly related to business expenses). For example, if 10% of your personal credit card use is for business expenses, you can deduct 10% of the credit card's annual fee on your taxes.
Separate from the fees for having or using a credit card, businesses can also deduct credit card transaction fees that they pay as part of accepting credit card payments from customers. (This is represented by the difference between a business's gross sale amount and the net payment received from their merchant service provider.)
In addition to credit card fees, businesses can deduct any fees they pay financing institutions – such as interest, fees or other expenses – so long as they're for legitimate business activities. This means that businesses can deduct expenses related to banking fees, such as account charges, check-printing fees, stop-payment fees and wire transfer fees. [Read related article: The Complete List of Small Business Tax Deductions]
Common mistakes when deducting credit card fees
Deducting credit card fees is relatively straightforward: If they're for business, you can deduct them; if they aren't, you can't. But people often make it more complicated or difficult than it needs to be. One of the biggest ways they do this is by not keeping separate accounts for personal and business expenses.
Here are some of the most common mistakes people make when deducting credit card fees:
- Deducting annual fees for personal cards used occasionally for business expenses: When you use a personal credit card for business, it's a lot harder to determine which fees – and how much of those fees – are business-related and which aren't.
- Deducting credit card interest on a personal return: Individuals can deduct their mortgage interest on their personal tax returns, so they often mistakenly think they can deduct credit card interest as well.
- Deducting credit card expenses that aren't allocable to business activities: To claim a tax deduction for credit card fees, a taxpayer must be able to show that the expense is directly related to business.
- Double-deducting processing fees: Many business owners only claim as income the funds they receive from their merchant service provider. If that's the amount they claim as income, then this amount is already net of credit card transaction fees, so they can't deduct those charges again.
All credit cards have fees and expenses – not just for having and using them but also for accepting them. In both cases, these charges are tax-deductible, but only for businesses and only when they're related to legitimate business expenses.
If you're going to deduct expenses for credit card fees on your taxes, be sure to keep an accurate accounting of all of your fees. To make this easy, it's best to have separate cards – including one that you use only for business – so that all of the fees related to a specific card can be directly attributed to business expenses. This requires more forethought, but it is far more effective than using a personal card for business and trying to figure out at tax time what is deductible and what's not.