Let’s face it: Tax season isn’t the best. But there are certain things you can do to make it a bit more bearable — like learning how to save some money through deductions.
For example, deducting tax interest accrued on credit card purchases can help reduce the taxes you owe. However, this only works for some purchases.
If you accrued credit card interest on personal expenses, your interest isn’t tax-deductible. But interest accrued on business expenses is tax-deductible. This often includes expenses for businesses, contractors and other self-employed individuals.
To deduct credit card interest on business purchases, you must fit this criteria:
- You are legally liable for the credit card debt
- You and the lender have a creditor-debtor relationship
- You intend for the debt to be repaid
Can I use a personal credit card for business purchases and get a tax deduction?
Yes, but you’ll need to calculate the amount of interest accrued to your business purchases. Since you’ll likely have both personal and business purchases on your credit card, calculating interest could be a hassle.
Why can’t I deduct credit card interest on a personal card?
In 1986, US President Ronald Reagan signed the Tax Reform Act of 1986, which was designed to simplify the federal income tax code by removing tax deductions and tax shelters. Credit card interest on personal expenses was made ineligible for tax deductions.
If you use your credit card for personal expenses, your card fees aren’t tax-deductible. But if you use your credit card for business expenses — you can get tax deductions on most of your credit card fees. The following fees are tax-deductible:
- Annual fee
- Foreign transaction fee
- Late payment fee
- Overdraft fees
- Cash advance fees
- Balance transfer fees
- Most other credit card fees
Note: If your business accepts credit card payments, you can get a tax deduction for fees charged by your payment processor.
Paying your taxes electronically can come with a 2% or 3% processing fee. This fee is tax-deductible for both personal and business credit cards.
Criteria for deducting credit card fees
To deduct your credit card fees, you need to:
- Have a business. A sole proprietorship, a corporation or a limited liability company (LLC) are all eligible to get tax deduction on your business-related credit card purchases.
- Separate your business expenses. If you use your personal credit card for business purchases, you can’t deduct your entire card’s annual fee because you’ll need to calculate how much money you spend on business purchases as opposed to your personal purchases. To simplify bookkeeping, use a business credit card for your business purchases.
- Keep clear records. This is important, especially if you mix personal and business purchases. With good record-keeping, you can easily find which fees were incurred on your business-related purchases.
Separating your business and personal expenses is one of the best ways to simplify the accounting process for tax deductions. If you don’t have a business credit card yet, consider applying for one.
Interest accrued on your business purchases — whether it be on a personal or a business credit card — is tax-deductible. If you use a personal credit card for your business expenses, you’ll need to calculate the interest on your business purchases yourself.
To simplify the process, consider applying for a business credit card and separate your personal and business expenses.