Tax deductions are important tools that can reduce your company’s overall tax burden. When you take advantage of them, it becomes easier for your company to achieve profitability.
But the U.S. tax code is complex, leading most people to ask themselves, “Can you write off credit card interest?”
After all, you shouldn’t have to pay taxes on revenue you use to cover the cost of doing business, and interest on business purchases is a cost of doing business. So is business credit card interest tax-deductible? Read on to learn the details.
Is business credit card interest tax-deductible?
You can deduct credit card interest for your business, but you may not be able to deduct all of the interest you pay on your business credit card. You can use only the interest charged on the percentage of your balance that was generated through business purchases as a tax deduction.
However, if you’re unable to keep your business credit and personal credit separate, you’ll need to keep track of what portion of your balance was the result of business purchases. As you use your credit card, make notes of which purchases were made for business purposes and which purchases had personal intentions. Then, when it’s tax time, you’ll be able to write off the percentage of the interest you paid that’s directly related to your business purchases.
When is credit card interest tax-deductible?
Your credit card interest is deductible anytime that interest is the direct result of a business purchase. Such purchases include:
- 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 rates for entertainment purchases—that is, as long as the entertainment was 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.
When isn’t credit card interest tax-deductible?
You cannot write off any interest relating to personal purchases. For example, if you need to go to the doctor and don’t have the personal capital available to cover the bill, you may swipe your business credit card. Interest you pay on this portion of the balance isn’t deductible.
Also, keep in mind that there are tax breaks for personal expenses like student loans. However, if you pay your student loan off with your business credit card, this counts as a personal purchase.
As such, the interest you pay on that portion of the balance is not tax-deductible. So be sure you don’t trade debt with tax-deductible interest for debt that isn’t tax-deductible.
How to claim business credit card interest as a tax deduction
Follow these steps to claim your business credit card interest as a deduction on your tax return.
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 alleviate any headaches associated with this, keep all of your receipts—or use a platform like Ramp, which automatically logs receipts and categorizes expenses for you.
Determine what portion of your interest is tax-deductible
You can deduct only the portion of your interest that was the direct result of business expenses. If you use your business credit card only for business expenses, you can deduct 100% of your interest. If not, you’ll need to do some math to determine what portion of your interest is tax-deductible.
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.
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:
- 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.
- S corporations: S corporations log credit card interest deductions on line 13 of Form 1120-S.
Get Ramp to simplify your expense management and tax deductions
Taxes are a complex topic, but they don’t have to add stress to your workday. Consider signing up for Ramp. Ramp is a modern type of spending account that automatically logs your receipts, categorizes your spending, empowers your employees, and integrates with your favorite accounting platform to take the headaches out of money management and tax deductions.
There is no limit to the amount of interest you can deduct as long as the interest you paid was the direct result of a business expense.
Many small-business owners and entrepreneurs use their business credit cards for personal expenses. In these cases, you can’t write off the portion of the business credit card interest that’s related to personal expenses. You can deduct only the portion of the interest that’s the direct result of a business purchase.
You’ll need your credit card statements to prove the interest you were charged was related to a business expense. It’s also a good idea to keep receipts for all business purchases just in case the IRS says there’s not enough information on your credit card statements.
Important note: This article is for informational purposes only. The U.S. tax code is complex, and you should speak with a professional before making any tax-related decisions.