Is Credit Card Interest Tax Deductible?
As a business owner, you look for every possible tax credit and deduction in order to reduce your tax liability. One helpful deduction that’s easy to overlook is credit card interest. Here’s what you need to know.
Interest on Any Business Expense Is Deductible
Using a credit card is the same thing as taking out a loan, and IRS rules are very clear about business-related loans. Anytime you borrow money for your business or use a credit card to pay for business-related expenses, you can deduct the interest and other bank charges from your revenue.
Credit card processing costs are also fully tax-deductible, and these include all merchant account fees, transaction charges and internet gateway costs. This deduction effectively reduces your taxable income, lowering the amount of self-employment and income tax you owe.
Only Business Purchases Qualify for the Deduction
If you’re the sole proprietor of a small business, you may use the same credit card for personal and business expenses. This might seem like an easy way to keep your accounting simple, but it actually complicates your life at tax time. The IRS doesn’t allow you to deduct the interest you pay on nonbusiness purchases because that personal interest is considered a private lifestyle choice.
If you carry a balance on your credit card that represents a mix of personal and business purchases, it may be very tricky to separate out which portion of interest is business-related when you’re calculating tax deductions. Also, the idea of handing over your personal credit card statement to your business accountant may not be appealing.
Use a Separate Credit Card for Business
No matter how small your company is, you can benefit from the simplicity of maintaining a separate credit card account that’s strictly for business expenses. It’s often helpful to your business cash flow to pay over time for large-ticket purchases of tools and supplies, and it’s reassuring to know that the interest, bank fees and even late charges on that credit card are all tax-deductible. You can keep the statements from this account with your business paperwork, and they provide an excellent record of the purchases you made over the tax year.
Business accounting can be tricky because of the need to keep track of the smallest details. Savvy business owners, and their accountants, know that every tax deduction adds up. Deducting your credit card interest can bring a small but significant benefit to your bottom line.