Credit card fees can be a pain. However, the good news is that business-related credit card fees are tax-deductible. Credit card fees are considered part of the cost of doing business. As such, they’re classified as business expenses.
On the purchasing side, deductible credit-card-related charges include interest expenses, balance transfer charges and cash advance fees. On the selling side, all credit card processing fees, including percentage-of-sale fees, per-transaction fees, chargeback fees, PCI compliance fees and more are deductible.
Here’s everything a business owner needs to know about assessing their business credit card fees and properly deducting them from their tax obligations.
Tip
Like all accounting and tax matters, deducting credit card fees is a nuanced process. When in doubt, work with a tax consultant to keep everything above board and avoid a tax audit.
Credit card fees explained
Credit card companies charge various fees for business and personal cards. Fees can be assessed annually or when specific events occur, or they can be ongoing. Here are some examples:
- 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 specific actions, like a cash advance or a balance transfer.
Credit card fees vary by card and issuer. For example, some cards don’t charge an annual fee, while others charge hundreds of dollars yearly.
Possessing and using a business credit card is one thing. However, additional fees apply when a business accepts credit cards as a form of payment from their customers. When you accept credit cards, debit cards and various digital payment methods, you’ll incur processing fees on each transaction. These fees are usually a few cents per transaction plus a small percentage of the sale amount.
In exchange for processing fees, credit card companies accept liability for instances of credit card fraud or if a user tries to back out of the transaction later.
Did You Know?
Top-tier credit card processors have reasonable fees, ensure you're paid quickly, and provide excellent support. Read our reviews of the best credit card processors to learn more.
Business deductions for credit card fees
According to IRS Publication 535, businesses can deduct 100 percent of credit card expenses used only for business purposes. 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 for the business (i.e., fees directly related to business expenses).
For example, if 10 percent of your personal credit card use is for business expenses, you can deduct 10 percent of the credit card’s annual fee on your taxes.
Businesses can also deduct the credit card transaction fees 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 — as long as they’re for legitimate business activities. Other deductible banking fees include account charges, check-printing fees, stop-payment fees and wire transfer fees.
How to deduct business credit card fees on your taxes
Any business can deduct credit card fees on their taxes. The form you use depends on your business structure.
- Corporations: Incorporated entities, including limited liability companies (LLCs) filing as a C-corp, use Form 1120. Those filing as an S-corp use Form 1120-S.
- Partnerships: Partnerships file using Form 1065.
- Other entities: Unincorporated business owners (i.e., sole proprietors) and single-owned LLCs can deduct credit card fees for qualifying business expenses using Form 1040 Schedule C.
To deduct business credit card fees on your taxes, you must demonstrate 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 company car, you don’t get to deduct the entire annual fee for your card. It’s wise for business owners to 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 another big reason for businesses to keep separate financials and use credit cards wisely: 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.
FYI
Business credit and debit cards differ. Credit cards can offer rewards and help build your credit score, while debit cards are easy to get and accepted everywhere.
Business vs. personal credit card fees
Though credit card companies charge fees for business and personal credit cards, only businesses can deduct credit card fees. Furthermore, 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 deducting credit card fees a challenge because expenses must be directly related to business and only business.
Did You Know?
Cashback, free travel and other rewards you get from using your business or personal credit cards are not considered income and, as such, are not taxable.
Common mistakes when deducting credit card fees
Deducting credit card fees is relatively straightforward. If they’re for business use, you can deduct them; if they aren’t, you can’t. However, people often make this more complicated than it needs to be. Perhaps the biggest issue is 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. People sometimes make the mistake of deducting annual fees for personal cards they only use occasionally for business expenses. When you use a personal credit card for business, it’s much 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 also deduct credit card interest.
- 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.
Stay organized with your business credit cards
All credit cards have fees and expenses for usage and acceptance. However, charges are tax-deductible only for businesses citing legitimate business expenses.
If you’re going to deduct expenses for credit card fees on your taxes, keep an accurate accounting of all fees. To make this easy, it’s best to have separate cards — including one that you use only for business — so all fees related to a specific card can be directly attributed to business expenses. This level of organization requires more forethought, but it’s far more effective than using a personal card for business and trying to determine what’s deductible at tax time.
Jennifer Dublino contributed to this article.
