Both individuals and businesses have the potential opportunity to deduct expenses from their gross income to lower the amount of money they pay in annual taxes to the Internal Revenue Service (IRS). The provisions and deduction procedures for individuals and businesses are different so it is important to understand which ones apply. In general, pretty much anything pertaining to a credit card is not tax-deductible as a personal itemized deduction but is tax-deductible for a business.
Key Takeaways
- Credit card fees are not deductible for individuals and are deductible for businesses.
- Businesses can deduct all credit card fees as well as finance charges.
- Businesses are eligible to deduct credit or debit card processing fees associated with paying taxes, but individuals are not.
Are Credit Card Fees Tax-Deductible?
The short answer is, it depends. It largely depends on whether any credit card fees are incurred for business purposes or if the card was for personal use. Below are details for each type of situation.
Individual Deductions
The Tax Cuts and Jobs Act (TCJA) was signed into law by former President Trump in December 2017 (with the majority of its clauses taking effect in 2018). The TCJA was the biggest overhaul of the tax rules in 30 years. For individuals, it wiped out many of the miscellaneous itemized deductions taxpayers had used in previous years. Some of the most prevalent changes eliminated expenses taken by individuals for business involvement, such as vehicular costs.
Individuals looking to take advantage of itemized deductions do so on Schedule A. For Schedule A itemized deductions to be worthwhile, they must exceed the standard deduction given to all taxpayers. Due to the TCJA standard deductions for U.S. taxpayers increased substantially.
For the tax year 2022, those deduction amounts are:
- $12,950: single taxpayer (increasing to $13,850 for 2023)
- $12,950: married taxpayer filing separately ($13,850 for 2023)
- $19,400: head of household ($20,800 for 2023)
- $25,900: married taxpayer filing jointly ($27,700 for 2023)
- $25,900: qualifying widow(er) ($27,700 for 2023)
With these standard deductions, the need for itemized deductions became obsolete for most taxpayers. Regardless, finance charges and annual fees for credit cards were never eligible for itemized deductions. Prior to 2018, taxpayers could deduct transaction costs for credit and debit card payments made to the IRS. After the TCJA these deductions were also no longer allowed.
Business Deductions
Tax deductions for businesses are another story. Nearly any business credit card fee or credit card company charge incurred by a business through the use of a credit card has been and still is eligible to be deducted as a business expense.
Depending on the type of business, a company will either file Schedule C or Form 1120. Corporations file Form 1120 while all other businesses use Schedule C.
Allowable deductions for businesses are detailed in IRS Publication 535. Businesses have the opportunity to deduct nearly any expense involved with their business throughout the year when they are determining their bottom line for annual taxes.
When it comes to credit card usage, businesses can deduct finance charges, annual fees, monthly fees, late fees, and more. The catch is, charges must be associated with the business. For example, this alleviates an annual fee on a personal credit card but could include finance charges on purchases made with the card. Businesses can also deduct any credit or debit card processing expenses involved with paying their taxes.
Moreover, businesses can also deduct the expenses they pay to accept credit cards as a merchant. These fees can be complex. Card network processors may charge merchants a flat fee for the privilege of acceptance. Merchants also pay a card processing transaction fee on each card transaction to the card issuer. These fees and any others incurred by a merchant are reported as business expenses and allowed as tax deductions.
FAQs
Key Takeaways
Can I claim credit card fees tax? ›
Because they can be classified as operating expenses, the answer to 'are merchant fees tax deductible' is usually yes. Your business pays fees to both the card issuer and card network processor to accept credit card payments.
Where do credit card fees go on Schedule C? ›
As for how those fees should be reflected on your tax return, you can deduct credit card fees on line 17 of your Schedule C form.
Can you write off payment processing fees? ›
Transaction fees incurred through a payment processor are generally tax-deductible, since they are also considered to be ordinary and necessary expenses directly related to the operation of your business. By deducting transaction fees, you can reduce your taxable income, resulting in tax savings.
What expense category are credit card processing fees? ›
There are two methods to consider when accounting for credit card processing fees or merchant fees: either as a cost of sales (or COGS) or as an operating expense.
Can you write off credit card fees? ›
Credit card fees are not deductible for individuals and are deductible for businesses. Businesses can deduct all credit card fees as well as finance charges. Businesses are eligible to deduct credit or debit card processing fees associated with paying taxes, but individuals are not.
Can you deduct credit card interest and fees on taxes? ›
Key takeaways
Credit card interest is not tax-deductible for personal expenses. The government stopped allowing a tax deduction for credit card interest in the 1980s. Interest on student loans, mortgages, home equity loans, and business expenses are still tax-deductible.
How do you classify credit card fees? ›
Credit card fees explained: 8 types you should know
- Annual fees. An annual fee is a fee your credit card company may charge you for being a cardholder. ...
- Balance transfer fees. ...
- Late fees. ...
- Interest fees. ...
- Foreign transaction fees. ...
- Cash advance fee. ...
- Returned payment fee. ...
- Credit card processing fees.
Credit card expense may be classified as an administrative expense.
How do you record credit card fee expense in accounting? ›
In your journal entry, you must:
- Debit your Cash account in the amount of your Sale – Fees.
- Debit your Credit Card Expense account the amount of your fees.
- Credit your Sales account the total amount of the sale.
This surcharge is imposed to reimburse itself for the cost of processing the credit sale through the card issuer. The surcharge amount is part of the consideration for the sale of the tangible personal property, and is therefore part of gross receipts subject to sales tax.
How do I offset credit card processing fees? ›
How to Offset Credit Card Processing Fees?
- Consider Level 3 interchange Processing. ...
- Add a Convenience Fee for Credit Card Usage. ...
- Accept ACH Payments. ...
- Use a Bank Payment Network. ...
- Go Digital. ...
- Invest in Security. ...
- Integrate Systems. ...
- Automate Where Possible.
Any interest or bank fees that are charged on your account, credit card, loans, or lines of credit are tax deductible. If you use a third-party payment processor like Square, you can also deduct the transaction fees that are taken out of your deposits.
What is another name for credit card processing fee? ›
Interchange Fees
The interchange fee is a payment made directly to the card issuer for the swiped transaction. Fees may vary based on the type of card being used, the amount of the transaction and the industry the business is in.
Where do merchant fees go on a tax return? ›
Merchant service fees are a tax-deductible cost of running your business. Businesses can deduct the full cost of merchant services fees on line 17 of their Schedule C (Legal and Professional Services) form.
Can you write off PayPal fees? ›
As long as you're using PayPal to collect business income, the fees you pay the platform for the privilege should be tax deductible. It doesn't matter whether you use a personal or business PayPal account.
Can credit card fees be taxed? ›
This surcharge is imposed to reimburse itself for the cost of processing the credit sale through the card issuer. The surcharge amount is part of the consideration for the sale of the tangible personal property, and is therefore part of gross receipts subject to sales tax.
Are credit card fees tax deductible when making a donation? ›
The fees charged by the processor are actually a cost your organization incurred for using the processor. It is not a reduction in the donation made by the donor. For IRS purposes, the full $100 should be credited to the donor, regardless of processing fees.
Are credit card balance transfer fees tax deductible? ›
Entrepreneurs can deduct expenses that are both “ordinary" and "necessary” to their business, according to Internal Revenue Service regulations. Fees on business credit cards — annual fees, late fees, balance transfer fees, etc. — can fit that description.
Can credit card be used for tax deduction? ›
Key Takeaways
Credit card interest is not deductible on income taxes. The personal interest deduction was eliminated in the Tax Reform Act of 1986. Interest payments on home loans, student loans, and investment property may be tax-deductible.
