Is business credit card interest tax-deductible?
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As a business owner, you're always looking for ways to save money and make your operation more efficient.
One way to do that is by using a business credit card for your purchases. But did you know that the interest you pay on that credit card might be tax-deductible?
That said, the rules surrounding deductible interest can be complex, and there are some important caveats you need to be aware of.
In this post, we'll break down everything you need to know about business credit card interest and its tax implications, so you can keep more money in your pocket and avoid any unpleasant surprises come tax time.
Is business credit card interest tax-deductible?
If your credit card is only used for business expenses, then the interest paid on those charges will be tax-deductible.
However, 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, 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 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.
When isn’t credit card interest tax-deductible?
You can't write off any credit card interest for personal purchases. For example, if you need to go to the doctor and use your business credit card, you won't be able to deduct the interest you pay on this portion of your balance.
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 isn't 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
To claim your business credit card interest as a deduction on your 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.
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.
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.
Business credit cards often come with annual fees. The good news is that these costs are considered deductible as a legitimate business expense 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 deductions to avoid any complications.
Understanding these additional tax implications of business credit cards allows you to make informed financial decisions and maintain proper documentation to support your deductions and compliance with tax laws.
Get Ramp to simplify your expense management and tax deductions
Your taxes can be complex, but they don’t have to add stress to your workday.
To simplify your taxes, consider Ramp. Ramp is a corporate 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.
Managing your taxes can be a chore, but Ramp makes things much easier.
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.