If your tax bill is causing you a lot of headaches, it’s smart to look for new ways to reduce how much you owe. One easy way to accomplish this goal might involve boosting contributions to a tax-advantaged retirement account, like a 401(k), in order to reduce your taxable income.
You can also look for new deductions to claim. However, you should be aware that the Tax and Jobs Act of 2017 nearly doubled the standard deduction for most people, making it less likely you’ll be able to itemize on your taxes.
Still, the Internal Revenue Service (IRS) lets consumers write off certain types of interest on their taxes each year if they qualify. For example, it’s possible to deduct interest paid on a mortgage up to certain limits when you itemize, and you may even be able to deduct any student loan interest you paid. You may also be able to deduct investment interest up to your net investment income, as well as “interest incurred to produce rents and royalties,” notes the IRS.
Is credit card interest tax deductible?
With all these possible deductions, you may be wondering, “Is credit card interest tax deductible, too?”
Unfortunately, the tax code doesn’t let consumers deduct credit card interest paid on a credit card for personal expenses. Since the average credit card interest rate is already high at over 17 percent, this is yet another reason you should strive to avoid this type of debt if you can.
Of course, this shouldn’t be surprising since the IRS doesn’t go out of its way to subsidize personal spending. Specifically, the IRS lists the following types of interest as absolutely not deductible on IRS.gov:
- Interest paid on an auto loan when the car is for personal use
- Credit card interest incurred for personal expenses
- Installment loan interest incurred for personal expenses
- Points paid as a seller, service charges, fees for credit investigation, and “interest relating to tax-exempt income, such as interest to purchase or carry tax-exempt securities”
When credit card interest is tax deductible
There is one major scenario when credit card interest is tax deductible. Any time a credit card is used solely for business purchases, such as with a business credit card, the interest is tax deductible. For this benefit to count, each purchase must qualify as a business expense under IRS rules.
Another rule in this realm governs when you are able to deduct credit card interest on a business credit card. Generally speaking, you deduct business purchases in the year the purchase is made. On the other hand, you deduct credit card interest charged on business accounts in the year you pay it.
This distinction is important since, many times, you’ll pay credit card interest on business purchases long after the purchase is made and long into the next year or even subsequent years.
Do you need a business credit card to deduct credit card interest?
You don’t have to have a dedicated business credit card in order to deduct business-related credit card interest on your taxes. However, having a separate business credit card does come with benefits.
A separate business credit card can make it considerably easier to track your purchases and any credit card interest you pay for starters. Not only that, but many business credit cards come with consumer protections like auto rental coverage, purchase protection and extended warranties.
Many of the top business credit cards also let you earn rewards on all your spending, along with a big initial signup bonus if you can meet a minimum spending requirement.
So no, you don’t have to have a business credit card to deduct credit card interest charged on business purchases. However, you may want to sign up for one anyway.
What else is there to know about small business tax deductions?
If you frequently mix business and personal spending on credit cards, you’ll need to take extra steps to determine how much of the interest you’re paying is deductible as a business expense. Let’s say you charged $15,000 in balances to a personal credit card with $7,500 of your balance going to pay for new business equipment and supplies. In that case, approximately 50 percent of the interest charged on your credit card would be deductible as business expense.
Still, it’s important to note that carrying a balance so you can deduct credit card interest as a business expense is rarely a good deal. The average credit card APR is well over 17 percent, after all, and many business credit cards charge rates higher than the national average.
Just because credit card interest is tax-deductible doesn’t mean it’s “free money.” You still have to pay off the interest you earn on your business credit card. In other words, if you pay $250 in credit card interest, you won’t save $250 in taxes. You’ll simply get to subtract $250 from your taxable income.
Of course, plenty of other bank-related fees can also be deductible if your account is used for business purposes. This can include the annual fee on your business credit card, as well as account maintenance fees, foreign transaction fees and ATM fees.
Also, note that there are plenty of other deductions small businesses can take on their taxes. According to the IRS, business expenses that qualify for a deduction “must be both ordinary and necessary.” The institution notes that an ordinary expense is “one that is common and accepted in your trade or business,” whereas a necessary expense is “one that is helpful and appropriate for your trade or business.” That said, an expense does not have to be indispensable to be considered necessary.
If you’re curious about all the different expenses that might qualify as tax deductible for your business, this guide from the IRS can help.