Are Credit Card Processing Fees Tax Deductible for Businesses? What Every Merchant Should Know

Are Credit Card Processing Fees Tax Deductible for Businesses? What Every Merchant Should Know

The good old tax deduction conundrum. When you’re just starting out as a business owner, it can be tough to know which business fees are tax deductible, what fees aren’t tax deductible, and which fees might be tax deductible. That’s why it’s vital to hire a good accountant who can help you navigate your finances when tax season rolls along. In doing so, you’ll reduce the stress that comes with preparing taxes—and when done right, you can even improve your business’s bottom line. 

According to the Bureau of Labor Statistics, 20 percent of small businesses fail in their first year because they run out of capital. This means that there’s a big opportunity to set your business up for continued success (and to edge out the competition) by identifying the areas where you can save.

Fortunately, most credit card fees are tax deductible for business-related expenses and, if you play your cards right, you’ll be able to maximize your credit card tax deductions. Knowledge is power in this arena. So, with no more ado, let’s take a look at which credit card fees are tax-deductible for your business and how you can make the most out of your potential deductions.

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Are Credit Card Processing Fees Tax Deductible?

The short answer is yes. Credit card processing fees (sometimes referred to as merchant services fees) are tax-deductible since they’re considered a cost of doing business. To make sure you maximize your deductions, you need to work with a knowledgeable CPA who can guide you through the process and prepare your tax return.

It’s also helpful to work with a credit card processor that offers easy-to-generate reports and accounting integrations to make it easy to surface the info you need during tax season.  

In addition to credit card processing fees, you may also deduct other fees associated when using your business credit card. More on this below.

Which Credit Card Fees Can Be Deducted?

When you think about deducting business expenses (like credit card fees), does it bring to mind an image of spending hours in a dark basement at the end of the year poring over your bank account with a fine-toothed comb? This isn’t an appealing visual, but it’s a common one, so it makes sense why so many business owners get squirrely when the conversation turns toward credit card tax deductions. 

To make things a whole lot less complicated and reduce the risk of error, consider opening a business credit card instead of trying to process deductions from your personal account. A business credit card qualifies your business for perks that you wouldn’t have access to otherwise and it makes accounting easy. 

You can deduct any and all fees that come with your business credit card, including:

  • Annual fees
  • Overdraft fees
  • Transaction processing fees
  • Credit card interest on past transactions
  • Miscellaneous charges 

Not bad, right? While not all business cards come with an annual fee, the ones with the good perks usually do, so it’s a good idea to weigh cost VS benefits to make sure that you’re getting the best possible deal for your unique business model. 

Plenty of rewards programs offer cashback or discounts on certain products. So, choose a business credit card provider with a rewards program that will help you save where you spend the most. 

Yes, even fees that come from processing your taxes

It’s easy to see the money paid to the IRS as money lost, but the reality is that the credit card “convenience fees” that come from paying your taxes online are tax deductible.

The Tax Cuts and Jobs Act of 2018 also qualifies business owners for a bevy of new deductions through the IRS, so take a look at the Tax Withholding Estimator to see if your business is eligible for additional deductions outside of credit card fees. 

According to the IRS, any “ordinary expenses,” i.e. expenses that are “common and accepted in your industry” can be used as tax write-offs. “Necessary” expenses are also fair game, so check out Publication 535 to learn whether specific credit card fees your business incurred make the grade.   

As the IRS puts it:

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

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Which Fees Are NOT Deductible?

Any personal transactions that you process on your business card aren’t tax deductible. Neither are the fees––interest, overdraft fees, transaction fees, etc.––that result from those personal transactions.

While certain accounting platforms can make it a lot easier to categorize your business and personal transactions, you’re still better off if you keep those personal and business transactions totally separate. After all, if the IRS comes knocking you want to be sure that you haven’t overestimated your write-offs.

On the business side, late fees and balance transfer fees aren’t tax deductible, so be wary about claiming these expenses on your tax return.

Can business owners deduct credit card processing fees as well?

As mentioned earlier—yes. As long as those fees are for business transactions. Of course, just because fees are a tax write-off doesn’t mean they’re free, so you still want to save as much as possible on credit card fees

As for how those fees should be reflected on your tax return, you can deduct credit card fees on line 17 of your Schedule C form.

How can business owners maximize their credit card and payment processing tax deductions?

Evaluating your credit card statement is important, but there’s no need to try to do all of that work on your own when maximizing your credit card deductions can be as easy as finding the right accountant to do your taxes. 

Ask around within your industry, and check every potential accountant’s reviews online to find someone that knows how to identify every deduction possible. You also want an accountant who is familiar with recent tax law updates and offers tax advice, since those 2018 laws will help you make the most of your yearly revenue. 

By maximizing your deductions and staying on the up-and-up with the IRS you’ll be able to boost your business’s credit rating, so you’ll be in a better position to apply for a business loan if you want to scale down the line.  

Mistakes and Pitfalls to Avoid

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One of the biggest mistakes that you can make when striving to lower your credit card processing fees is to take every bank quote at face value. 

If you’re still encountering more credit card fees than you’re willing to pay business, you may need to hone your negotiating skills by asking your credit card company to waive specific fees. In fact, just by asking most consumers are able to get their rates reduced significantly.

CNBC reports that a whopping 70 percent of consumers who asked their card company to waive their processing fees were successful, and more than half (56%) were even able to negotiate a lower interest rate––just by requesting it! 

The other big pitfall you could fall prey to is using your personal credit card for all of your transactions. No matter how good your accountant is, they’re not going to be able to mark off all of your business deductions on your personal card. This means you’ll miss out on deducting certain transactions, which equates to leaving money on the table that could be used for the benefit of your business. The right accountant will work with you to help you identify how to deduct fees the right way. 

But in the meantime, you’ll want to work with a payment processing solution provider that you can trust––such as Payment Depot––which has an award-winning in-house customer service team that works around the clock to answer any questions you may have. So, you don’t miss any potential deductions, or any opportunities to boost your business’s profitability on the back end. 

Quick FAQs about Credit Card Processing Fee

Q: Are credit card processing fees tax-deductible for businesses?

Yes, credit card processing fees, often referred to as merchant service fees, are tax-deductible for businesses. They are recognized by the IRS as an essential operating cost of doing business.

Q: What types of credit card fees can a business deduct?

A business can deduct a variety of fees associated with its credit card, including annual fees, overdraft fees, transaction processing fees, credit card interest on past transactions, and miscellaneous charges.

Q: What are some tips for maximizing credit card tax deductions?

Some ways to maximize credit card tax deductions include working with a knowledgeable CPA, using a credit card processor that offers easy-to-generate reports and accounting integrations, and considering the opening of a business credit card to separate personal and business transactions.

Q: Can personal transactions processed on a business card be tax-deductible?

No, personal transactions processed on a business card and the fees that result from those personal transactions are not tax-deductible.

Q: Can late fees and balance transfer fees be deducted on a business tax return?

No, late fees and balance transfer fees are not tax-deductible.

Q: How should credit card processing fees be reflected on a tax return?

Credit card processing fees can be deducted on line 17 of your Schedule C form when preparing your tax return.

Q: Can businesses negotiate to lower their credit card processing fees?

Yes, businesses can negotiate with their credit card company to waive specific fees. Many businesses have been successful in getting their rates reduced by simply asking.

Q: What is the impact of tax deductions on a business’s credit rating?

Maximizing tax deductions and complying with IRS regulations can help improve a business’s credit rating, which can be beneficial when applying for a business loan in the future.

Q: Are credit card convenience fees for paying taxes online tax-deductible?

Yes, the credit card convenience fees incurred from paying taxes online are tax-deductible for businesses.

Q: Are there any new deductions for business owners under the Tax Cuts and Jobs Act of 2018?

Yes, the Tax Cuts and Jobs Act of 2018 qualifies business owners for new deductions. Business owners are advised to check out the IRS Tax Withholding Estimator to see if their business is eligible for additional deductions outside of credit card fees.

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