As a business owner, there is a large range of tax deductions available to the business that are not available to individuals. Examples such as dining out, tickets to events or memberships to clubs are all tax deductible as long as the expenses can be proven to be used for for business purposes. Similarly, business expense credit card fees are tax deductible whereas the same fees cannot be used for tax deductions if the expenses are personal. This article covers three tax deductions that are available when it comes to business related credit card fees.
1. Annual Fees
Many of the top tier credit cards that offer perks or exclusive benefits charge an annual fee for their use. If your business pays annual fees for these types of credit cards, those charges are considered business expenses and can be used as tax deductions. The important thing to remember is that the cards must be used primarily for business, rather than personal expenses. Although many personal credit cards also charge an annual fee, if the charges made are not related to business, the annual fees are not tax deductible. This tax deduction may help you justify the cost of a credit card with a large annual fee and allow you and your business to enjoy the benefits and perks of one of these top tier credit cards.
2. Interest Charges
Ideally you will not incur any interest charges with your credit card. Credit card interest rates are some of the highest of any financial instruments, so if it’s at all possible to avoid being charged interest, you should make that a priority. However, if you do end up carrying a balance on your business credit cards and are charged interest for that luxury, those interest fees are considered a cost of doing business and are therefore tax deductible. This includes interest charged on cash advances, balance transfers and regular purchases. Once again, the charges made on the cards and their resulting interest fees must be related to the business for the interest fees to be considered tax deductible. Personal charges that incur interest fees do not qualify as tax deductions.
3. Late Fees
If you happen to miss a credit card payment, not only will you be charged interest beginning with the payment due date, but you may also be charged an added late fee. Once again, it’s not in your best interest to incur these fees in the first place, but mistakes do happen. If there is a silver lining, it’s that the fee is considered tax deductible. That being said, if making late payments isn’t a habit, you can sometimes get these charges waived. Simply call your credit card company, explain your situation and hope they’ll remove the late fee. The fact is that saving a charge in the first place is much more advantageous than using that same charge as a tax deduction.
4. Processing Fees For Merchants
For businesses that accept payments by credit card, there is typically a processing fee of a few percentage points for each transaction. These fees, known as merchant fees or swipe fees, are administered by the credit card provider to cover the costs of authenticating credit card transactions, maintaining the infrastructure needed to process credit card transactions and to cover any liability issues resulting from fraud or misuse. As these fees are essential operating expenses and a necessary cost of doing business, they are considered fully tax deductible. Similarly, any fees that are generated by online transactions or money transfers also qualify as tax deductions as long as they relate to the business. For this reason it’s also important to keep track of fees charged by payment systems such as Paypal or money transfer services like Western Union.
5. Other Miscellaneous Fees
Any other types of credit card fees that are incurred as a result of doing business are also fully tax deductible. If you need to use your business expense credit card for a cash advance and are charged a fee for the convenience, that fee is tax deductible. Similarly if you use your credit card abroad or make a purchase from a foreign country using the local currency and end up being charged with a foreign transaction fee you can use that fee for tax deduction purposes come tax time. If you end up transferring a balance from one credit card to another, you’ll likely be charge a balance transfer fee. As long as the original balance that is being transferred is related to business, the subsequent balance transfer fee can be used as a tax deduction.
How To Ensure Your Tax Deductions Are Legitimate
Separate Your Credit Cards
As previously noted, only fees that are associated with business expenses are tax deductible. Therefore it’s very important to keep business and personal expenses separated. Although not absolutely necessary, one way to keep your records straight is to ensure you have separate credit cards for business and personal expenses. This simplifies your record keeping and ensure you don’t accidently use personal charges for tax deductions. It will ultimately be up to you to prove that the tax deductions you’ve used are legitimate, so a credit card that contains a combination of business and personal expenses will just make your job that much tougher.
Keep Accurate Financial Records
You’ll need to ensure your record keeping is up to date, accurate and confirmable. This is just as much for your own sake as it is for any tax auditor. If you do end up getting audited, the onus will be on you to come up with the proper paperwork to prove that the deductions you made are, in fact, legitimate. If you keep good records in the first place, you’ll have a much easier and less stressful time should you end up being audited. You’ll have been expected to retain and provide your credit card statements, receipts and any other financial documents pertaining to your tax return. Make it easy on yourself should you ever become audited and keep good financial records.
Emburse Credit Cards
Emburse now has access to full credit facilities enabling business expense credit card offerings with a wide range of payment options. If you’d like to learn more about the Emburse expense management system, get in touch for a free demo today.