Credit cards may charge a variety of fees, but they can’t be deducted from your taxes for a personal credit card. However, credit card fees on business cards are considered one of the costs of doing business, meaning the IRS allows small business owners, freelancers and sole proprietors to deduct them. Also unlike personal credit cards, business owners are also entitled to deduct any credit card interest.
But in order to take advantage of these tax deductions, business owners need to keep their business and personal transactions separate. If you charge personal expenses to your business credit card, the fees and interest associated with that card may no longer be tax deductible.
How the IRS classifies credit card fees
Credit card fees include annual fees, late fees, cash advance fees, balance transfer fees and foreign transaction fees. The IRS does not specifically classify these credit card fees as tax deductible, but IRS Publication 535 states that business owners can deduct business expenses that are ordinary and/or necessary:
An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.
This enables small business owners, freelancers and sole proprietors to deduct business credit card fees on their taxes. Credit card fees are both necessary and ordinary, in terms of the cost of doing business.
Are credit card fees classified as business expenses?
If you use a credit card exclusively for business expenses, the credit card fees associated with that card could be considered tax deductible business expenses. Many of today’s best business credit cards come with annual fees, for example -- and the IRSallows you to deduct those fees as part of the cost of doing business. If your business uses a credit card to pay taxes, you can also deduct any service fees associated with the transaction.
Keep in mind that you must keep your business and personal transactions separate in order to deduct the fees associated with your business credit card. If you make personal and business purchases on the same credit card, the credit card fees may no longer qualify as a tax deductible business expense.
Is credit card interest tax deductible?
When you use a credit card for personal purchases, your credit card interest is not tax deductible. If you use your credit card exclusively for business expenses, you may be able to deduct the interest on your taxes.
As with credit card fees, any interest you pay on your business credit card is considered part of the cost of doing business. That’s why you can deduct credit card interest on business credit cards but you can’t deduct credit card interest on personal credit cards.
As before, you must keep your business and personal transactions separate in order to take advantage of this potential tax deduction. If you put both personal and business purchases on the same card, the interest may not qualify as a tax deductible business expense.
Are credit card rewards taxable?
In most cases, you don’t need to pay tax on credit card rewards. Cash back, points and miles are considered discounts on purchases, not earned income. If you have a rewards credit card, feel free to maximize your reward opportunities without having to worry about paying taxes on your rewards earnings -- including welcome bonuses.
There are a few cases in which your credit card rewards may qualify as earned income. Referral bonuses, for example, are not considered discounts on purchases and could be considered taxable income. If you earn credit card rewards that are not associated with purchases or spending requirements, you may need to report that income on your taxes.
The bottom line
Credit card fees may be tax deductible, as long as you use your credit card exclusively for qualified business expenses. If you put personal and business purchases on the same credit card, you may not be able to deduct credit card fees on your taxes.
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