Tax time is always an adventure, particularly for entrepreneurs and small business owners. Navigating the complex maze of expenses and small business tax deductions can be a challenge, and no one wants to leave a valid deduction on the table. After all, every $100 in deductions results in an average tax savings of approximately $30.
Credit card interest is a substantial monthly expense for many businesses, which naturally raises the question: is business credit card interest tax-deductible? Unfortunately, the answer is a less-than-definitive “it depends.” To lend some clarity to the issue, let’s dig deeper into when you can write off credit card interest for your business, when you can’t, and how to make your life easier come tax season.
When you can deduct credit card interest
The good news is that all business-related interest is deductible. Like the interest on a business loan, interest paid on credit card debt can be written off if the debt is specifically related to your business activities. Even interest on cash advances can be deducted so long as the cash was used in a business capacity.
Remember that you can deduct interest only in the year in which you paid it, and bear in mind that interest may come in several forms: finance charges, late fees, ATM fees, foreign transaction fees and more.
If your business card has an annual fee, you can even deduct that. If you plan to take advantage of these deductions, be sure to keep all relevant receipts and credit card statements to make your small business tax filing process easier.
When you cannot write off credit card interest
Until the Tax Reform Act of 1986, deducting credit card interest was simple. All interest, even if associated with personal credit cards and non-business expenses, could be used for tax deduction purposes.
Since that point, however, interest on personal debts can no longer be used to lower your taxable income. This can create quite a mess if you’re using a personal credit card for business expenses. In that case, you’ll need to carefully review your records to determine which purchases are business-related and which are not. You can use this information to calculate the share of your overall interest payments that is related to business, which can be used in your deductions.
How to make life easier
This may all seem a bit convoluted, but there are steps you can take to make things much simpler when it comes time to file your return.
First, instead of using a personal credit card for business expenses, be sure to maintain a separate credit card account for personal use and a business credit card for all your business-related expenses. This will make the process of tracking and computing interest-related deductions far more convenient, and you may also have access to the valuable rewards and benefits that business cards often offer. Using a business card can also help to build a strong credit history for the business, making it easier to secure loans and lower interest rates in the future.
The ability to claim deductions on various allowable business expenses is an invaluable asset for any entrepreneur or small business owner. Failing to maximize your deductions essentially means leaving money on the table, which is something no business owner wants to do.
Now that you understand the basics of how to write off credit card interest, it’s time to get to work on digging up every last deduction. Of course, if you have a particularly complex tax situation or you aren’t sure whether your deductions are valid or not, it’s always best to seek the advice of a qualified tax professional.
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This article is updated from its original publication date of May 4, 2017.
This is not intended as legal advice; for more information, please click here.
