Can I Deduct Credit Card Fees As An Individual
Unfortunately, you cannot deduct credit card fees incurred from personal expenses and personal credit cards. Since the Tax Cuts and Jobs Act was signed into law, the standard deduction amount was increased leading to less of a need for itemized deductions. Nevertheless, individuals were not able to deduct various credit card charges and fees prior to the act anyway.
Can You Deduct Business Credit Card Interest And Fees
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When tax time rolls around, business owners have a lot of options to reduce their taxable income. If you use business credit cards for operating expenses or to finance large purchases, you may be able to deduct some of your costs.
As you prepare to file your taxes, heres what you need to know about business credit card tax deductions.
What Is Personal Interest
Personal interest is interest you pay for goods and services you don’t use for work or business-related purposes. Although not an exhaustive list, common examples include buying clothes, electronic equipment, cars and food using a credit card. When you make monthly payments that include interest, it is always nondeductible personal interest. This remains true even if you use the credit card to subsidize the purchase of your home.
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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 . 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.
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.
Can I Write Off Fees And Interest From My Business Credit Card Are Credit Fees Taxable
Keep in mind that you can also write off any annual fees, monthly fees or late fees from purchasing credit cards that are under your business name as long as the charges are actually associated with your business. You can find out what other allowable deductions there are for your industry by reviewing the IRS Publication 535. If its an expense youve only had because of your business conduct business, or if its an expense required for your type of work, its safe to bet it will be on this list.
Dont forget that the IRS does request both documentation and relevance and that the expense must be related to your business and not your personal finances. An easy way to keep your books separate is to open a specific bank account and credit card for your business and reserve them for business use only. That way, you can clearly sort out which purchases and charges are true expenses and which are simply personal spending.
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Tax Deductions And Retirement Contributions
One thing to watch out for is how claiming other business deductions affects the amount you can save in a qualified retirement account. Small business retirement plans limit your contributions to a certain amount, based on your income.
When you have a lower income you typically have lower taxes, but one of the benefits of having a higher income is that you can contribute more to a pension or retirement plan, says Paul T. Joseph, a certified public accountant and founder of Joseph & Joseph Tax & Payroll in Williamston, Michigan. Once you lower that income, you also lower the amount you can invest in a retirement plan.
In other words, claiming more business expense deductions could mean paying less in taxes but it could shrink your retirement contributions. Thats potentially the biggest downside with deducting expenses.
There may be another drawback if you plan to apply for a business loan or a personal loan, such as a mortgage. On paper, deductions can significantly reduce your business income, which might make you appear riskier to lenders.
Ways To Avoid Nondeductible Credit Card Interest
Sometimes it may be possible to claim an interest deduction for your purchase by using a payment method other than credit cards. For example, instead of using your credit card to pay your school tuition this semester, you may want to look into student loans first. When you use a student loan, the IRS allows you to deduct the interest payments you make on it until it’s paid off. For tax years prior to 2018, the interest on a home equity loan was deductible and could provide cash to make personal purchases and also allowed you to deduct the interest as part of your mortgage interest deduction. However, beginning in 2018, home equity loan interest is not deductible unless it is used to buy, build, or substantially improve your home.
Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. Whether you have a simple or complex tax situation, we’ve got you covered. Feel confident doing your own taxes.
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You May Also Claim Certain Operating Expenses Associated With Employing People Such As:
- salary and wages
- fringe benefits, including the cost of any fringe benefit provided and the associated fringe benefits tax
- protective clothing required for employees to carry out work activities
- allowances and reimbursements paid to employees who use their own mobile device for work purposes
- travel expenses for relocating employees
- losses due to misappropriation of money by an employee or agent, for example, fraud, theft or embezzlement
Key Points To Remember
Any business owner or individual getting ready to file annual or quarterly tax returns should keep the following key concepts in mind:
Payment processing fees on business credit cards can add up to a substantial amount in a normal year. Thats why its imperative to keep accurate records, make sure never to use your business cards for personal purchases, and never to use personal cards for business purchases. This form of mixing personal and company credit cards only leads to confusion and, in the end, will mean spending much more time preparing your tax return.
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What Types Of Interest Arent Deductible For Businesses
While you can deduct credit card interest fees, there are other types of interest that arent deductible. This list includes:
- Interest paid on loans used for personal purposes
- Interest on debts your business doesnt owe
- Interest on overdue taxes
- Prepaid interest if youre a cash basis taxpayer
- Interest paid on loans used to pay taxes or fund a retirement plan
- Interest on loans of more than $50,000 that you borrow against a life insurance policy
Fees Deductible In The Year Incurred
If you incur standby charges, guarantee fees, service fees, or any other similar fees, you may be able to deduct them in full in the year you incur them. To do so, they have to relate only to that year. For more information, go to Interpretation Bulletin;IT-341, Expenses of Issuing or Selling Shares, Units in a Trust, Interests in a Partnership or Syndicate and Expenses of Borrowing Money.
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Save Money With A 0% Apr Offer
If youre just starting out, chances are youre going to need to buy some things related to your endeavor. Whether its selling items online or launching a consulting business, a business credit card can provide instant access to purchasing power to help you get ramped up. Even better, if you get a business credit card with a 0% APR offer;on purchases, youll get some breathing room to pay off a big purchase without accruing interest charges.
Makes It Harder To Track Business Expenses
When you use your personal credit card for business expenses, it can be difficult to track tax-deductible purchases. As you review your credit card statements, you might not remember what you bought on each and every purchase and whether the purchase was a business expense. Business transactions can also get lost among all of your personal expenses, which means that you could miss out on valuable tax deductions or forget to bill a client for reimbursement.
Additionally, if you have an employee entering transactions into your accounting software, they might view personal information on your credit card statement. That information may include your home address, credit score, credit limit and personal purchases.
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Reasons You Shouldnt Use Your Personal Card For Business Transactions
Although you can use a personal credit card for business expenses, that doesnt mean that you should. Many small business owners use their personal and business accounts interchangeably.
In most cases, there isnt an issue. However, doing so can create problems down the road through the loss of legal protections, difficulty in separating business and personal expenses and missed opportunities to earn additional rewards and benefits.
Personal Cards Do Not Build Business Credit
Building credit is important in both your personal and business life. When you use your personal credit card for business expenses, you are not building your business credit history. Just like building your personal credit history is important for loans like mortgages and car notes, adding positive trade lines to your business credit report is important for future business lending needs.
As your business grows, you may want to apply for an equipment lease, purchase a building or seek funding for expansion. A strong business credit history will improve your chances of getting approved.
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The Ato Issues A Warning
For all you keen beans out there who want to lodge your tax returns as soon as the new tax year ticks over in July, the ATO suggests that you wait until at least the end of the month. In an ABC news article, the ATO advised people to wait until the end of July to make sure they have all the information they need to lodge their returns, and to avoid making any mistakes.
The ATO also highlighted a number of items it will monitor closely this year, as it looks out for both businesses and individuals attempting to overclaim within these categories. Claims under the microscope will include unsubstantiated, or higher-than-expected, work-related expense tax deductions and claims on rental properties, according to assistant commissioner Karen Foat.
According to official data, there were almost 9 million taxpayers claiming a total of $21.7 billion in work-related expenses in the 2017-18 financial year, with claims relating to cars, travel, clothing, mobile phone and internet use, and self-education expenses. This year, the ATO expects that figure to rise as a result of more people working from home.
An issue that may arise from this is the fact that many people may not know what they are and arent allowed to claim for in their new work-from-home role.
- Sales receipts
- Employee records
- Vehicle records
- Lists of debtors and creditors
- Asset purchases
Legal And Professional Fees
Legal and professional fees that are necessary and directly related to running your business are deductible. These include fees charged by lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping services such as Bench.
If the fees include payments for work of a personal nature , you can only deduct the part of the fee thatâs related to the business.
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Reporting Credit Card Transactions
It is important for merchants to review their bookkeeping and accounting. Once they begin reporting their card transaction to the IRS, it is important to make sure there are no discrepancies. The IRS has specific guidelines which are related to reporting credit card transactions, with the main regulation being REG-139255-08. There are rules for who must perform the reporting, as well as the manner in which the gross amounts will be calculated. Merchants must withhold funds so that they can be backup reported, and the IRS has also released a guide on how to fill out the 1099-K form.
Both merchants and their accountants will need to become familiar with the new format. Banks are also required to report the gross receipts. Because businesses frequently have chargebacks, refunds, or payments where the customer will receive some cash back, banks will only have to report the gross payments annually and for each month. Chargebacks, refunds and related items wont be factored against the gross amounts.
Using A Rewards Credit Card To Pay For Deductible Business Spending
A business credit card can offer convenience in paying for business expenses, as well as miles, points or cash back on purchases.
Paying for business expenses, including the purchase of equipment, inventory, charitable donations, etc. have the same treatment as if the business paid with cash or checks, says Wold. You can use a credit card to pay deductible expenses in to claim the deduction. Even if you dont pay off that credit balance until , it will still be deductible on the return.
If youre planning business spending for this year, consider these cards for covering deductible expenses:
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Business Vs Personal Expenses
Its important to remember that only the interest that is associated with business expenditure is an allowable expense.
One of the benefits of having a business credit card rather than a personal one is that your business spending is kept separate from your personal spending, making it easier to calculate the amount of interest you have paid over the tax year and therefore what you can claim as an allowable expense.
It is best to keep a record of all your business expenses as proof of your costs. You wont need to submit this with your self-assessment form, but HMRC may ask to see evidence if it has a query. This is another argument for taking out a business card: A business credit card keeps all your business expenditure is in one place, and your statements can be provided as proof.
Tip: Although credit card charges are tax deductible, it is still best to avoid interest charges on if possible. If you are looking to get a business credit card, and think you may carry a balance for a short time, then you may want to consider one that has an interest-free period on purchases. This would mean that you could avoid incurring interest charges on your balance for the promotional period, and hopefully pay off your debt interest-free, over a period of time.
Ready to find the credit card thats right for your business? A great place to start is our list of the top business credit card offers.
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What Credit Card Interest Is Deductible
While you can’t deduct credit card interest, you may be able to write off interest you paid on business expenses charged to your card. This also includes business expenses for contractors and self-employed individuals. A list of qualified business expenses are listed on the IRS’ website here.
You can still deduct this kind of interest even if the credit card you used isn’t specifically a business credit card, said Palion. And conversely, personal expenses on a business credit card is still considered non-deductible.
This all probably sounds extremely confusing. The easiest way to remember is: Interest from personal expenses are not deductible. Interest from business expenses is deductible.
You can make things easier come tax time by using a separate credit card for all business expenses. This simplifies the process of calculating the interest you’ve paid. Keep track of your receipts and the amount of interest paid throughout the year.
Mixing business with pleasure, credit card-wise, can make deductions difficult to figure out. If you use the same credit card for business and personal expenses, you may wind up combing through your statement to separate out the business statements and calculating the amount of interest paid.