If you were hoping to deduct interest from personal credit cards on your taxes, you may be out of luck. The tax code allows you to deduct credit card interest only when a card is used for business expenses.
Here is more about this IRS rule as tax deadlines approach.
[Read: Best Business Credit Cards.]
Can You Write Off Credit Card Interest?
Consumers can’t write off interest from personal expenses they put on credit cards. But if you’re a business owner who uses a credit card only for business expenses, you can deduct the interest charges.
These credit card charges are tax deductible:
Interest. You can deduct interest paid on your credit card for business expenses as long as you meet certain requirements. The IRS requires that:
— You must be legally liable for the debt.
— Both you and the lender intend to repay the debt.
— You and the lender have a true creditor-debtor relationship.
Keep in mind that if you’re not liable for the full amount of the debt, you can only deduct the interest you can attribute to your portion. This can happen in partnerships and businesses with multiple owners.
Also, remember that you may pay interest on business expenses in the year or years after the purchases.
Fees. Any credit card fees you’ve paid can be deducted as a business expense. “This includes finance charges, late fees, ATM fees, foreign transaction fees and annual credit card fees,” says Carter Cofield, owner and lead advisor of Cofield Advisors, which specializes in financial planning for entrepreneurs.
Keep your credit card statements so you can track fees and interest charges you pay during the year.
[Read: Best 0% APR Credit Cards.]
Can You Write Off Personal Expenses on Your Business Credit Card?
If you’re using a business credit card, any interest that applies to your purchases is tax deductible, right? Well, not necessarily.
You can deduct interest charges for business expenses, but not for personal expenses you put on your business credit card. That’s why you’ll want to keep business and personal expenses separate, even though it can feel like a hassle.
There are good reasons for it. “Separating business and personal expenses helps to simplify the process of tracking business expenses,” says Will Luckert, chief operating officer at Capital One Small Business Card, “which can make tax time much easier, as well as help maximize deductions and minimize tax burdens.”
You could end up with some tough math to do at tax time if you mix business and personal expenses on one card, Cofield adds. “If you’re using your business card for both business and personal use, you’ll have to calculate which interest charges are business versus personal,” he says.
If you incurred card fees throughout the year, you may also need to figure out what portion of those fees are related to your business.
Do You Need a Business Credit Card to Deduct Interest on Business Purchases?
The IRS does not specify that you need to incur interest charges or fees on a business credit card to qualify for the deduction. You can use a personal credit card for business expenses and still write off any interest and fees.
Of course, you will need to be clear about which expenses are personal and which ones are related to your business.
Even if that’s not a challenge for you, getting a business credit card could help in other ways. You could qualify for a higher credit limit with a business credit card, for example. Also, a business credit card helps businesses establish credit.
Dodging Interest Beats Taking a Tax Deduction
Getting a tax deduction for interest paid on a credit card can help reduce how much you owe in taxes or even boost your refund. But you’ll save more money by avoiding unnecessary interest and fees.
“There is an old tax saying that goes, ‘Don’t let the tail wag the dog,'” Cofield says. “Simply put, don’t incur excess expenses just for the tax write-off.”
As an example, claiming $1,000 in deductible interest can reduce your taxable income by $1,000, but your actual savings are much less. If your effective tax rate — the average rate a person or corporate pays — is 25%, you’re essentially spending $1,000 to save $250.
If you can avoid spending that money in the first place, it could bolster your bottom line.
If not, you can find business credit cards with interest-free windows of up to a year to pay for major purchases or even operating expenses. Many business credit cards don’t charge annual fees.
When your card doesn’t have a special introductory rate, you can still avoid interest charges by paying your balance in full and on time each month. And if you plan to carry a balance over a long period, you may want to see if you can get a cheaper form of credit, such as a small-business loan or line of credit.
Even if you think you won’t have interest charges, it pays to know how much you can deduct each year on your taxes.
“All business owners should have a discussion with a tax expert to learn about expenses they can write off,” Cofield says. “Thousands of dollars of write-offs are left on the table every year by business owners not fully understanding what they can expense off their tax return.”
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