Tax season can be stressful. That’s why you’ll want to arm yourself with as much information as possible going into the process of preparing your business taxes. One question that many businesses have at this time of year is ‘Is credit card interest tax deductible for business?’ Well, the short answer is a bit unsatisfying: it all depends. Fortunately, this post will explain what you need to consider.
Understanding When You’re Able to Deduct Credit Card Interest
There are many expenses and deductions that a small business must take into account when doing its taxes. How do you know you’re doing everything right? Businesses can save a great deal from their legitimate deductions. But what expenses can you legally deduct?
For most small businesses, credit card interest is a substantial monthly expense. It would benefit your business a great deal if it were always deductible, right? Unfortunately, the situation isn’t as straightforward as that. In other words, there’s no single way to answer whether credit card interest is deductible for business. The truth is that it varies case by case. However, by understanding credit card interest a little better, you can maximize your deductions and stay out of trouble at the same time.
So, is Credit Card Interest Tax Deductible for Business or Not?
The concept is simple. All business-related interest can be deducted. This can be for business loans or interest paid on credit card debt also, as long as it was specifically used for business needs. This rule also applies to cash advances, but only if the money is used for business-related purposes.
This interest can come in several different forms, including ATM fees, late fees, and even finance charges.
If your business credit card has an annual fee, you’re allowed to deduct these expenses as well. To take advantage of all these deductions, you will need to keep all the receipts and statements that are derived from your business expenses. File them away neatly to make accessing them easier. The more information you have on hand, the less likely you are to miss any eligible deductions.
When Credit Card Interest Can Not Be Deducted
Before the Tax Reform Act of 1986, deducting interest from credit cards was rather easy. You could deduct all credit card interest you paid; even if it was accrued on a card designed for personal use. Unfortunately, this is no longer the case.
Now, you’re not allowed to use personal debts to lower your amount of taxable income. However, this can get a bit tricky when you use personal credit cards to pay business expenses. In these cases, you need to separate which transactions were used for your business and which were personal matters.
This is when all the receipts and statements you’ve diligently filed away come in handy. When this is done properly, you can calculate the share of overall interest payments that were used for your business and arrive safely at the figure that can legitimately be deducted.
How a Business Credit Card Can Make Your Life Easier
The whole tax process can definitely seem confusing. There are many different factors to consider, but there are certain things you can do to make things a bit easier. Using a separate credit card for all business expenses is one of the best things you can do to simplify matters. That way, it will be much easier to record what expenses you incurred while trying to build up your business.
Additionally, you can gain rewards with your business card just as you can with a personal credit card. Another benefit of having (and using) a dedicated business credit card is that it helps build your business a solid credit history. This will help you secure any business loans you might need in the future.
So, apply for a business credit card right away if you don’t already have one. It will allow you to deduct business expenses painlessly. These deductions can save your business a great deal of money, so why wouldn’t you take advantage of this opportunity? Absent these deductions, and you’ll end up paying more taxes than necessary. This money would be better used if it went into the growth of your business.
With this new understanding of how credit card deductions work, you can now answer the question ‘is credit card interest tax deductible for business?’ If you need help with this or any other business tax matter, seek out a qualified tax professional right away. Whether you use online accounting services or an in-house professional, there are ways to make sure you are making the most out of your taxes with as little stress as possible.
About C&C CPA Services
Rosangely is the President and co-founder of C&C CPA Services PA, with over 10 years’ experience in the industry and a specialty in small business accounting and tax services. If you have any questions in the area of finance, accounting or tax Rosangely will be more than happy to help!