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Business owners can write off many costs involved in their day-to-day operations, but one that may be often overlooked is the ability to deduct business credit card annual fees from their taxes.
Here’s the good news: annual fees (as well as some other credit card fees) on business cards are tax deductible, according to guidelines from IRS Publication 535.
In order for your expense to be deductible, it must be “both ordinary and necessary,” according to the Internal Revenue Service. Here’s how the IRS defines these expenses:
- Ordinary expenses are “common and accepted in your industry.”
- Necessary expenses are “helpful and appropriate for your trade or business.”
Business credit card annual fees fall into these requirements since many of the daily business transactions you make will be paid for with a credit card, and the annual fee helps provide a payment method.
“Yes, for businesses they are deductible, and if an individual has a small business or is self-employed, they are [also] deductible as business expenses,” said Mark Steber, senior vice president and chief tax officer for Jackson Hewitt. This is especially helpful for business owners who pay a hefty annual fee — sometimes up to $595 — for a business card.
However, you should only use a business card for business expenses; not personal expenses, as credit card interest on personal expenses is not tax-deductible. Things get complicated if you pay for personal expenses on your business card, and this may disqualify you from deducting the annual fee.
Certain credit card fees are deductible only if they are incurred on behalf of your business, said Steber. However, if you use a personal card solely for your business, then that annual fee can be considered a deductible expense. As a business owner, it’s best to keep expenses separate by using two cards — one for personal expenses and another just for business expenses.
Just know, while it’s helpful that business card annual fees are tax deductible, that alone isn’t a valid reason for opening a card with a sky-high annual fee. You still need to be able to justify paying the fee every year. Before you open any business card that incurs an annual fee, consider if the rewards and added perks will continue to offset the fee every year. Most business cards that charge high annual fees provide benefits, such as annual credits and high rewards rates on typical business spending, which help offset or justify a high fee.
For example, The Business Platinum® Card from American Express has a steep $595 annual fee, but if you take advantage of the $200 annual airline fee credit and $200 annual Dell statement credit, the fee is effectively knocked down to $195, but you can deduct the entire annual fee. Factor in the rewards program, shopping discounts, application fee credits for Global Entry or TSA Pre✓®, and the fee can be more than worthwhile.
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However, if your business doesn’t require frequent travel, you may want to consider a business cashback card, such as the Capital One® Spark® Cash for Business, which earns 2% cash back for your business on every purchase, everywhere. Spending $4,750 annually can offset the fee, which is waived the first year.
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- Earn unlimited 2% cash back for your business on every purchase, everywhere
- Earn a one-time $500 cash bonus once you spend $4,500 on purchases within 3 months from account opening
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See additional details for Capital One® Spark® Cash for Business
Find out if interest on a business credit card is tax deductible.