Can You Deduct Credit Card Interest?

We’re already halfway through the tax season, and if you haven’t filed your taxes yet, you may be wondering which tax breaks you qualify for, or you may be researching on how you can better prepare for next year’s tax return to take advantage of the deductions that may apply to you. Have you ever wondered if credit card interest is tax deductible? It turns out that the interest you pay on your credit card is deductible, but not everyone can claim the tax break. Let’s find out who is eligible and what exactly can be deducted.

If you are a business owner, you are in luck, because you can deduct the interest you pay on your credit cards as a business expense, in addition to other costs associated with your account. This includes credit card fees and merchant fees. Interest paid on personal purchases is not tax deductible.

To elaborate on the interest fees, if you used your credit card for business expenses, the interest you paid on those purchases can be deducted as a business expense. There are some qualifications required by the IRS. In order to qualify, you must be legally liable for the debt, both you and the lender intend for the debt to be repaid, and you and the lender have a true creditor-debtor relationship. If you are not liable for the full amount of the debt, you can only deduct the amount of interest that belongs to your portion. Normally, you see this with partnerships or businesses with multiple owners.

When it comes to credit card fees, these can be deducted as an expense as well. For example, finance charges, late fees, ATM fees, foreign transaction fees, and annual credit card fees. Best way to keep track of all these fees? Make sure to hold on to your credit card statements from the whole year.

Also, keep in mind that if your business accepts credit cards as a method of payment, you have to pay a small percentage from every transaction to the credit card company that processes it. You can deduct these merchant fees as a business expense.

Make sure that you are separating your business expenses from your personal expenses. Even if your personal and business expenses are on the same account, only the business expenses can be deducted. Using your business card for both business and personal use can make it difficult to calculate which interest charges are from business versus personal expenses. The same applies to any fees incurred on the card. To make this easier, try using your business card for business expenses only.

What if you use a personal credit card? The IRS does not specify that you need to incur interest or fees on a business credit card specifically in order to qualify for the deduction. If you use a personal credit card for business expenses, you can still write off any interest and fees you pay on them. Still, it’s best if you have a business credit card because you may qualify for a higher credit limit and establish business credit.

There are some additional forms of interest that are tax deductible. These include interest paid on business loans, interest paid on an investment property, interest paid on a mortgage loan, certain interest paid on a home equity loan or line of credit, and student loan interest.

If possible, try to avoid the tax deduction altogether. Yes, getting a tax deduction for the interest that you paid on a credit card or other qualifying loan can reduce how much you owe in taxes and even boost your refund, but what’s the best way to even avoid having to write-off these expenses in the first place? Avoid building up interest by paying off your balances each month, and avoid incurring fees, for example, by looking for business credit cards that don’t charge annual fees. If you plan on carrying a balance over for a long period of time, try applying for a small business loan or line of credit which may offer better terms.

If you are a business owner, make sure to speak with a tax expert to learn more about the expenses you can write off. You may be leaving a lot of money on the table by not fully understanding what deductions you qualify for. But, make sure that you aren’t claiming expenses incorrectly, as that can lead to issues with the IRS down the road.


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