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, here’s what you need to know about business credit card tax deductions.
What you can deduct with a business credit card
The IRS allows business owners to deduct any ordinary and necessary expenses. This means that the expenses are common to your type of business and are helpful and appropriate in running it.
When it comes to credit cards, that includes eligible interest and fee expenses paid or accrued during the year, depending on how you report it.
Credit card interest
It’s generally best to avoid paying interest on a credit card. But if you paid or accrued interest during the tax year, you may be able to deduct it on your tax return.
For the interest to be eligible for a deduction, the IRS requires that:
- You are legally liable for the debt
- Both you and the lender intend for the debt to be repaid
- You and the lender have a true debtor-creditor relationship
If you’re only partially liable for the credit card balance — this is often the case if you’re in a partnership — then you can only deduct your share of the interest paid or accrued.
Credit card fees
Over the course of the year, you may have also incurred fees when using your credit card. Some credit cards, for instance, charge annual fees. Others charge for certain activities, such as cash advances, balance transfers, or late payments.
If you’ve paid or accrued any such fees over the year, you can deduct them as a business expense.
Keep in mind that this also includes convenience fees not charged by your credit card’s issuer. These fees are assessed by businesses that may not accept credit cards as a primary payment method but will do so for a small fee.
Personal versus business expenses
If you’re just starting out with your business or you’re a one-person show, you may have been using the same credit card for your business and personal expenses.
If this is the case, it’s important to make sure that you only deduct interest paid on your business expenses and not your personal expenses. Doing the math on this can be tricky, and you may want to enlist the help of a tax professional to get it right.
To avoid having to deal with this, consider getting a separate credit card to use solely for business purchases.
You’re better off without the deduction
While deducting credit card interest and fees can help reduce your taxable income, you’ll save a lot more by trying to avoid them in the first place.
There are plenty of business credit cards, for instance, that don’t charge an annual fee. Unless you can make up for a card’s fee with its rewards program and benefits, it’s better to find one that doesn’t have one.
As for cash advance fees, they tend to be high and are often accompanied by an APR that’s higher than your regular purchase APR. In general, it’s best to consider a cash advance as a last resort.
Balance transfers can be helpful if you’re trying to pay down high-interest debt. But take some time to run the numbers to make sure the interest savings are worth it.
Also, credit card convenience fees are rarely worth it. With most merchants that charge them, the fee is often a higher percentage than what you’d get back in rewards on the purchase. So if you have cash or another means to pay, it’s best to avoid the fee.
Finally, interest can run upwards of 20% on some business credit cards, so it’s best to avoid it by paying your balance in full each month. If you’re in a situation where you can’t avoid interest entirely, try to get a business credit card with a low interest rate.
The bottom line
Business owners can certainly deduct credit card interest and fee expenses. But if you can swing it, you may be better off finding less expensive ways to finance your business. Also, if you’re using one card for both personal and business expenses, make it a priority to get separate accounts to make things easier as you get ready to file your return.
This article was originally written on January 11, 2019 and updated on December 10, 2020.