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If you’re a business owner who carries a balance month-to-month, you may wonder if all that interest you paid can be written off at tax time.
The silver lining to revolving business expenses month-to-month is that the interest, as well as any fees you incur on a business credit card, are tax deductible.
Publication 535 from the IRS details what type of expenses can and cannot be deducted on your taxes. Expenses must be deemed “both ordinary and necessary,” to qualify for deduction. The IRS defines an ordinary expense as one that is “common and accepted in your industry,” while a necessary expense is “helpful and appropriate for your trade or business.”
The IRS further explains the requirements for interest to be tax deductible:
- You are legally liable for that debt.
- Both you and the lender intend that the debt be repaid.
- You and the lender have a true debtor-creditor relationship.
Interest deductions limited to legitimate business expenses
Just know, interest can only be deducted if it stems from a business expense. For example, if you buy a computer for personal use on a business card and incur interest, you cannot deduct those charges. However, if the computer is for business use, then the purchase, along with any interest charges associated with it, are deductible.
You can deduct business-related purchases made with a personal credit card, too, or any other form of payment, said Mark Stebler, chief tax office at Jackson Hewitt. It’s not the type of payment that matters, but “how the expense is related to the business,” he said. And, any interest charges resulting from business-related purchases on a personal card are also eligible for deduction.
If you are partially liable for a business card, you can still deduct any interest charges assessed, up to the amount of your liability. For example, if you and your business partner share liability for a business card that incurred interest last year, you would be able to deduct 50% of the interest charges on this year’s taxes.
While it can be helpful at tax time to have the ability to deduct interest charges from a business card, you’ll still end up paying fees to your creditor. Try to pay bills on time and in full every month to prevents interest charges and other penalties. If you can’t afford to pay your bill, consider business cards offering intro 0% APR periods for up to 15 months on new purchases and balance transfers. You should also review each statement to see if there are opportunities to cut costs.
Find out if business credit card annual fees are tax deductible.