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.
As a seasoned expert in tax regulations and financial matters, my depth of knowledge extends to the intricate details of tax deductions for both individuals and businesses. I've navigated through the complex landscape of tax laws, staying abreast of the latest changes and nuances. Allow me to provide a comprehensive understanding of the concepts discussed in the article.
Individual Deductions:
The article mentions the Tax Cuts and Jobs Act (TCJA), a pivotal legislation signed into law in December 2017. This act significantly altered the tax landscape for individuals. Under TCJA, many miscellaneous itemized deductions previously available to individuals were eliminated. For those looking to leverage itemized deductions, it became imperative for these deductions to surpass the standard deduction.
For the tax year 2022, standard deductions for U.S. taxpayers increased substantially. The amounts are as follows:
- $12,950 for a single taxpayer (increasing to $13,850 for 2023)
- $12,950 for a married taxpayer filing separately ($13,850 for 2023)
- $19,400 for head of household ($20,800 for 2023)
- $25,900 for married taxpayers filing jointly ($27,700 for 2023)
- $25,900 for qualifying widow(er) ($27,700 for 2023)
Despite these changes, finance charges and annual fees for credit cards were never eligible for itemized deductions. Furthermore, the article notes that, before 2018, taxpayers could deduct transaction costs for credit and debit card payments made to the IRS. However, after the TCJA, these deductions were no longer allowed.
Business Deductions:
Businesses operate under a different set of rules. The article outlines that, for businesses, nearly any credit card fee or charge incurred through the use of a credit card is eligible to be deducted as a business expense. The type of business determines whether it files Schedule C or Form 1120, with corporations using Form 1120 and other businesses using Schedule C.
The IRS Publication 535 provides a detailed breakdown of allowable deductions for businesses. In the realm of credit card usage, businesses have the flexibility to deduct various charges such as finance charges, annual fees, monthly fees, late fees, and more. However, a crucial condition is that these charges must be associated with the business.
Businesses can also deduct expenses related to credit or debit card processing when paying their taxes. This includes fees paid to accept credit cards as a merchant. The complexity of these fees, ranging from flat fees charged by card network processors to transaction fees paid to card issuers, is navigated by businesses, and all these expenses are reported as business expenses, allowing for tax deductions.
In conclusion, the article highlights the divergent tax treatment of credit card expenses for individuals and businesses, underlining the importance of understanding the specific provisions and deduction procedures that apply to each entity.
