Is credit card interest tax deductible for businesses?

Yes, interest on a business credit card is generally tax-deductible as a business expense, provided that somebody used the credit card for legitimate business purposes only.

When it comes to deducting credit card interest, the IRS draws a clear distinction between business use and personal use expenses. Per IRS code, you’re allowed to deduct interest on business charges but not personal ones.

There’s more to it than this, though, and in this article we'll break down everything business owners need to know about business credit card interest and its tax implications. That way, you can keep more money in your pocket and avoid any unpleasant surprises come tax time.

When credit card interest is tax-deductible

If your credit card is used exclusively for business expenses, the interest paid on those charges is generally tax-deductible. This applies to all types of businesses, whether you operate as a sole proprietor, freelancer, self-employed individual, LLC, partnership, or corporation. As long as the interest is incurred on legitimate business-related expenses, it can be deducted when you file your taxes.

What qualifies as a business expense?

Your credit card interest is deductible when the charges are related to ordinary and necessary business expenses, such as:

• Travel: This includes any interest on purchases like fuel, airfare, hotel stays, food, and other travel-related expenses you incur as a result of your business operations.
• Entertainment: You can deduct interest expenses for entertainment purchases—that is, as long as the entertainment is for business purposes. This includes things like taking your employees or clients out to dinner and a show.
• Office supplies: Any interest paid on balances that are the result of office equipment purchases can be written off.
• Marketing and advertising (social media ads, website hosting, business cards)
• Business meals (subject to IRS limits)
• Professional services (legal fees, accounting, consulting)
• Inventory and supplies
• Business utilities and software subscriptions

» Learn more: 20 business tax deductions you can write off

‍When credit card interest isn't tax-deductible

While credit card interest on business-related expenses is generally deductible, there are specific situations where it is not eligible for a deduction. Understanding these scenarios can help you avoid costly mistakes and ensure accurate tax reporting.

When using a business credit card for personal expenses

If you use your business credit card for personal expenses as well, then you'll need to keep track of what amount of your balance was spent on business purchases. Then, come tax season, you'll be able to write off the percentage of your interest payments that are directly related to business expenses.

Any interest that accrues from personal purchases cannot be written off as a business expense.

Interest on personal credit cards (even for business purchases)

If you use a personal credit card for business expenses, the interest on those charges is not automatically tax-deductible. You may be able to deduct the interest only if you properly track and document the business-related costs. However, this can be more complex and may raise red flags with the IRS. Balance transfer fees are also not tax deductible when using a personal, non-business card.

Late payment fees and penalties

While business interest payments are deductible, late payment fees and penalties are not. The IRS does not allow deductions for credit card late fees, over-limit fees, or interest accrued on unpaid penalties.

Cash advance interest and fees

Taking a cash advance on a business credit card can be risky, and the interest charged on cash advances is usually not tax-deductible—even if the money is used for business purposes.

Interest on non-essential or unreasonable business expenses

While most ordinary and necessary business expenses qualify for deductions, the IRS may disallow deductions for expenses that are considered extravagant, excessive, or unrelated to your business operations.

Student loans

There are tax breaks for personal expenses like student loans; however, whether you pay your student loan off with a personal credit card or your business card, this counts as a personal purchase.

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What is the limitation on business interest expense deductions?

The limitation on business interest expense deductions is primarily governed by the rules set forth in the Tax Cuts and Jobs Act (TCJA) of 2017, which introduced significant changes to how these deductions are handled. Here are the key points:

Interest Deduction Limitation: Generally, the deduction for business interest expense is limited to the sum of:

• Business interest income,
• 30% of the adjusted taxable income (ATI), and
• Floor plan financing interest.

Adjusted Taxable Income (ATI): For tax years beginning before January 1, 2022, ATI was similar to EBITDA (earnings before interest, taxes, depreciation, and amortization). Starting in 2022, ATI is more aligned with EBIT (earnings before interest and taxes), which generally results in a lower threshold for the interest deduction since it excludes depreciation and amortization.

Exemptions: Certain small businesses are exempt from this limitation if their average annual gross receipts for the prior three years are $27 million or less (as of 2023, adjusted for inflation).

Real Property Trades or Businesses: These businesses can elect out of the limitation, but they must use the alternative depreciation system (ADS) for real property used in the trade or business.

Farming Businesses: Farming businesses can also elect out of the limitation and must use ADS for certain property.

These rules can be complex, so you should consult with a tax professional to understand how the limitations apply to your specific circumstances.

How to claim business credit card interest as a tax deduction

To claim your business credit card interest as a deduction on your income tax return, follow these steps:

Keep your receipts

Your credit card statements may be enough to justify your business expenses, including interest, but that’s not always the case. The Internal Revenue Service may decide that there’s not enough information on your credit card statement to determine whether the expenses were for your business or for personal reasons.

To avoid any headaches, keep all of your receipts—or use a platform like Ramp, which automatically logs receipts and categorizes expenses for you.

Determine what percentage of your interest is tax-deductible

You can only deduct the percentage of your interest that results from business expenses. If that's all you use your business credit card for, then you can deduct 100% of your interest. If not, you’ll need to do some math to determine how much of your interest is tax-deductible.

File the proper forms

Finally, when you file your tax return, it’s important to file the right forms to claim your deductions. The forms you use to log these deductions depend on the type of business you have:

• S corporations: S corporations log credit card interest deductions on line 13 of Form 1120-S.
  
• Self-employed independent contractors without a separate business entity: Log your credit card interest on line 16b of Schedule C. You’ll file this with Form 1040.
• Partnerships and limited-liability companies: Partnerships and LLCs typically report credit card interest on line 15 of Form 1065.

Business expenses examples

Let’s say you have a $10,000 balance. This balance consists of $7,500 in business purchases and $2,500 in personal purchases, and you paid a total of $2,000 in interest on the balance during the tax year.

In this case, 75% of the balance is business-related, meaning that 75% of the interest you paid is tax-deductible. That works out to $1,500 in tax-deductible interest.

If you’re not 100% sure of the percentage of your interest that you can deduct, consider reaching out to a tax professional.

Other tax implications of business credit cards

Taxable rewards and cashback

Business credit cards often come with rewards programs that offer cashback, points, or miles. While these rewards can be valuable, they're generally considered taxable income by the IRS. For more information about which credit card rewards are taxable, read our article on the subject.

Annual fees

Business credit cards often come with annual fees. The good news is that these costs are considered legitimate deductible business expenses when filing your taxes.

Employee card usage

If you provide employees with additional credit cards linked to your business account, be mindful of the potential tax implications. Make sure that personal charges made by employees on these cards are appropriately accounted for and excluded from business tax deductions to avoid any complications.

How Ramp can simplify your tax deductions

For small business owners, tax time can be particularly stressful—but it doesn’t have to be.

To simplify your taxes, consider Ramp. Ramp is a business credit card that automatically logs your receipts, categorizes your spending, empowers your employees, and integrates with your favorite accounting platforms to take the headaches out of money management and tax deductions.

Ramp doesn’t have any of the typical credit card fees like annual fees, foreign transaction fees, or late fees. Because you’ll pay your balance in full each month, there are no interest charges.