Is Credit Card Interest Tax Deductible for My Business

Individuals and businesses use credit cards every day. Both earn rewards points that make paying for needed items easier. But if you’re a business owner, your business credit card has expenses and fees attached to it. Thankfully, some of those expenses and fees are tax deductible on your business taxes—including the credit card interest. Some business credit cards are better at helping you score deductions on your taxes than personal cards. In fact, nearly every fee you pay on your business credit card can be written off.

Let’s look at how credit card interest is tax deductible along with some other possible deductions. A note: Don’t assume these deductions apply to your personal credit card.

1. Credit Card Interest Charges

In an ideal world, you won’t pay interest on your business purchases. But, there are times when you need equipment, and there just isn’t enough cash in the bank to pay for it right away or to pay the full balance on your card that month. The good news, you can deduct any interest charges you do pay from your taxes. The only requirement is that the purchase that you’re deducting the interest for business-related and made during that tax year.

To determine how much interest you paid over the year for business expenses, simply check the monthly credit card statements from your business card issuer.

2. Annual Fees

The annual fees you pay on your business credit card are tax deductible, which can help justify getting that business credit card with the steeper annual fee that also has amazing rewards. Yes, you can write it off. Remember though that the primary use of the card needs to be for business purposes and not for personal expenses.

>> Looking for a no-annual-interest business card? Check out the Chase Ink Business Cash credit card. Read our full review.

3. Late Fees

Hopefully, you’re not incurring late fees on your business credit cards. Mistakes happen though, and you may sometimes forget to make a payment. If that happens, late fees can be written off of your business taxes. Of course, it’s always best to call the company and explain you forgot and ask if they can waive the fee this time. Saving $39 is likely going to deliver a higher ROI than claiming a tax deduction for a late fee.

4. Swipe Fees

If you accept credit card payments from your customers, you pay a swipe fee to the customer’s card issuer each time. That fee can be from 1.5% to 5% of the transaction total. The good news here, those fees are deductible from your business taxes as well.

5. Miscellaneous Fees

Sometimes other fees are associated with using a business credit card. For instance, if you need cash, any cash advance fees are deductible. However, most financial professionals don’t recommend this expensive way of accessing cash. Do, consider it for emergencies only.

Convenience fees—paid for the “convenience” of using a credit card to pay when the card isn’t a typically accepted form of payment—are also deductible on your business taxes.

Interest Paid on Personal Expenses Is Not Tax-Deductible

The deductibles covered here are for business credit cards and business expenses only. If you use your business credit card for any personal expenses and pay interest on those expenses, that interest is not deductible on your business tax return.

If you use your business card for personal expenses as well as business expenses, review your statements and calculate how much of the interest was for business expenses. Simply recalculate the interest for the total monthly balance minus the cost of the personal items.

It’s always easier to calculate your interest during tax time if you dedicate your business credit card to just business purchases. Keep your personal finances out of the equation. It’s also a better way to prove all your expenses if something comes up and the IRS has questions.

Maximizing Your Tax Deductions as a Business Owner

Using a business credit card is a great way to build a strong credit history for your business. Yes, Virginia, businesses have credit scores and reports too. And maintaining or building a good credit score and history for your business can help you get a business loan if needed someday. It’s also a way to ensure your business has access to lower interest rates on your business loans and credit cards.

And no matter how big or small your business is, if you use a business credit card for business expenses, you can deduct credit card interest charges and fees from your business taxes.

To maximize your business tax deductions, make sure to take advantage of each deduction available to you. If you’re unsure if a particular fee qualifies as a deductible expense, it doesn’t hurt to see a tax professional to make ensure you’re maximizing all the tax deductions available to you as a small business owner.

If you think you’ve been leaving credit card-related tax deductions on the table, it’s a good idea to go through your card statements before filing your taxes and add up all the fees. You could reduce your business tax liability considerably if you’re using your credit card for business use.

This article was originally published January 1, 2017, and has been updated by a different author.

At publishing time, the Chase Ink Business Cash card mentioned in this article is offered through product pages, and is compensated if our users apply and ultimately sign up for these cards. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).


When Is It Worth It to Hire an Accountant to Do Your Taxes?

When tax season rolls around, it’s easy to entertain the idea of hiring someone to do your tax return for you. Rather than spending a frustrating afternoon filling out forms and trying to wrap your head around complex tax terminology, how nice would it be to hire an accountant this tax season and call it a day?

While you certainly could do that — and if you have the money, I won’t try to stop you — there’s a good chance that hiring an accountant to do fill out your tax return would be like hiring a construction crew to help you build a dog house. In other words, you’d be wasting your money.

But there are circumstances — like when you need tax preparation for your business taxes or when you have failed to file your taxes in a previous year — where hiring a tax accountant isn’t just a smart idea – it could actually save you hundreds and even thousands by having a pro prepare your taxes. In that case, working with an accountant, instead of using tax prep or accounting software is actually the frugal choice.

Here’s what you need to know about when it makes sense to hire an accountant to file your taxes.

When you don’t need an accountant

The truth is, most of you probably don’t need to hire an accountant to file your taxes. If you have a traditional job that sends a W2 and you don’t itemize deductions, hiring an accountant would probably be overkill and you can file taxes for yourself.

Software like TurboTax or TaxAct should be more than adequate to handle a tax return for an individual or couple with only the basic tax forms. This type of software also tends to be much more affordable than a professional accountant when it comes to filing to pay income tax, which can cost between $200 and $500 on average. Software usually costs less than $60. If you earn under a certain amount, you may even get it for free.

If you can’t afford tax software or still want to talk to someone one-on-one about your taxes, you can often find free help. Many local libraries offer free tax assistance from qualified volunteers. It’s also important to remember that tax laws vary by state and if your return is complicated you may want to hire a CPA who can also help with tax planning.

When you should hire an accountant

Hiring an accountant is worth the extra cost when you run your own business, itemize deductions, own a rental property or have another complicated situation. Anyone who went through a divorce adopted a child or sold a business within the past year may have a radically different tax situation than most. This is where an accountant can help.

Some people say using tax software is the same as an accountant because the tax software will use the same deductions. The difference is that an accountant will poke around and ask questions to figure out which deductions you’re eligible for. The tax software assumes you know which deductions apply to you.

Even though accountants can be expensive upfront, hiring one could save you hundreds or even thousands of dollars. This is one instance where paying a premium is well worth the cost.

Here are some situations an accountant could help you with:

If you’re a business owner

Consumers who are self-employed or run their own small business should hire an accountant to avoid missing out on key deductions. For example, if you’re a yoga instructor, you may not realize you can deduct mileage to the yoga studio. This is just one example of many significant deductions you could be overlooking.

A qualified accountant will know how to ask the right questions. If you rent out a room on Airbnb, the accountant may ask if you buy cleaning supplies, extra sheets or toiletries just for that room.

These may be items you’d never think to include on a tax return.

Even if your business is only a side hustle, you may still benefit from hiring an accountant.

If you own rental property

Landlords will also benefit from a professional accountant. There are several deductions applicable to those who own real estate, and an accountant can help you identify which deductions apply to you.

An accountant may also recommend different ways to structure your rental property to maximize your tax deductions and add more legal protections. This will benefit you not just for this tax season, but for every tax season to come.

If you itemize deductions

About 30% of taxpayers in 2016 itemized their taxes, according to the Tax Policy Center. Itemizing taxes mostly applies to high earners or those with unusual circumstances.

If you’re having trouble deciding between itemizing or taking the standard deduction, a professional can help you choose the best course of action. If you do itemize, you want to make sure it’s done correctly.

If you want audit protection

The IRS audits about 1 in 140 people. The more money you make, the more at risk you are of getting audited. If you and your spouse make more than $500,000 a year, it may be worthwhile to hire an accountant just for the audit protection.

Audit protection means the accountant or the accounting firm will pay for any fees and interest owed if you’re audited by the IRS. They’ll also represent you in talking to the IRS about the audit.

This will be an extra cost on top of preparing your return, so make sure to buy audit protection before the accountant is done preparing your taxes. Most accountants won’t let you buy audit protection once they’ve submitted your return.

How to hire an accountant

The key to hiring an accountant is to find someone with experience in your particular area who can help with federal and state tax preparation as well as things that may apply to you including the self-employment tax. Whether you’re a business owner, a landlord with 10 properties or someone who recently inherited a large estate, you should be able to find an accountant who specializes in people like you. They’ll be more qualified to find the right deductions that apply to your specific circumstances.

Ask other people in your industry or those in a similar situation for their accountant or CPA recommendations. If they don’t have any recommendations, find an organization or association related to your occupation, and email them. They may have a list of referrals or a forum where you can pose the question and get the help you need in filing taxes to maximize your tax refund.

Before you decide on an accountant or firm, do some research of your own and schedule a phone call or in-person meeting. You want to be completely confident in your choice, and even something like a clash of personalities can make the experience more stressful than it has to be.

–By Zina Kumok


S Corp vs. LLC: Which Is Best for Your Business?

S Corp vs. LLC: Which Is Best for Your Business? – SmartAsset

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So you own a business and you’re looking to incorporate. Two of the most popular business structure are the S Corp and the LLC. Which is best for your business can depend on many factors, such as what you do for a living, your tax situation and more. We’ll walk through the key characteristics of the two, and how to decide between them.

Why Incorporation Is Important

In most cases, the best reason to incorporate is liability. When you create a corporation, you separate your personal assets from your company’s assets. If someone wants to collect a debt or, at worst, file a lawsuit, they can only do so against the company and any assets in that company’s name. In turn, your personal savings remain protected. Both LLCs and S corporations can effectively protect your home life from a downturn in your professional world.

What Is An LLC?

A limited liability company, or LLC, is a type of corporate entity. It’s one of the most basic business types, and chiefly serves to separate the assets of the business owner(s) from the business itself.

If you opt to create an LLC, you will have created an entity that exists entirely separate from yourself. Clients will do business with this entity, which will have its own assets, debts and liabilities. If someone collects a debt or sues the LLC, they cannot pass that debt on to you.

What Is An S Corporation?

An S corporation is a tax status that allows a company to pass all profits directly through to its owner(s). This allows a small business to distribute profit-based income without double taxation.

Under the standard corporate form, known as a C corporation, a company first pays its corporate income tax. It then pays its owners and workers, who in turn pay personal income tax on that salary. This works well when a company functions entirely separately from the people who own and operate it.

However, in many small businesses, owners will take the profits entirely as their personal income. This creates a problem of double taxation, because in this case a business owner’s corporate income tax and personal income tax are one and the same. An S corporation allows the company’s owners to pay taxes only once via their personal income tax forms.

S Corp vs. LLC: Similarities and Differences

It is important to note that, because one is a corporate form and the other a tax status, LLCs and S corporations can, and do, overlap. To be clear, an LLC can file for S corporation tax status. Conversely, if you have S corporation tax status, you can also incorporate as an LLC. These forms do share a number of similar features, though, including:

  • Asset Protection – Both S corps and LLCs protect your personal assets from debt, bankruptcy, legal liability and other possible losses incurred by the corporation.
  • Double Taxation – All corporate profits pass along to the owners of LLCs and S corps without incurring corporate income taxes. This helps you avoid being taxed twice.
  • Multiple Members – LLCs and S corps can each have anywhere from one to multiple members, though an S corporation caps out at 100 shareholders. Further, only U.S. citizens and legal residents can be members of an S corporation.

In practice, one of the largest differences between LLCs and S corporations lies in how they assign payment. Under a default LLC operating as a sole proprietorship/general partnership, profits and expenses pass entirely through to the taxes of the individuals involved. Each participant both deducts business expenses and claims all profits on their personal income taxes. The LLC itself does not have any tax filings.

Under an S corporation, the members assign themselves a salary that the company pays out of its operating budget. This income must be reasonable for their position and industry. Then, after the company pays all expenses, it passes along any additional profits as a distribution to its members.

Here’s an example that illustrates these differences. Sue is a freelance programmer. She currently has an LLC that she operates. Last year she made $100,000 in income and had $10,000 in business expenses. Here’s how her tax situation plays out under the two statuses:

  • Sole Proprietorship LLC – Sue would claim $100,000 of personal income on her income taxes. She would reduce her taxable income by the $10,000 in expenses she incurred, leaving her with $90,000 in taxable personal income.
  • S corporation LLC – Sue has determined that a reasonable salary is $75,000. She would report that $75,000 as earned income. Her corporation would then pay the $10,000 in expenses and pass the remaining $15,000 as a profit distribution to Sue, who would report and pay taxes on it as corporate profit income.

Operating requirements for a multi-member S corporation are also significantly more complex than they are for an LLC. An S corporation must adopt bylaws which meet IRS guidelines and must have a corporate governing body that includes a board of directors and officers.

How Taxes Affect S Corps and LLCs

Most Americans pay a FICA tax of 7.65% of their income under $132,900, encompassing contributions to both Social Security and Medicare. Their employer pays the same 7.65% on their behalf. The self-employed, however, pay both sides of this tax, creating what’s known as the “self-employment tax.” This combines the aforementioned rates to the tune of a 15.3% tax on all self-employment income beneath the $132,900 limit.

The self-employment tax applies to all pass-through income as well. It does not apply to corporate profit distributions, though. The profit distributions will likely be taxed as ordinary income, while you may be able to classify them at the lower dividend income rate. In the end, you will not pay any payroll taxes on them.

S corporation members do not pay self-employment taxes on their profit distributions either. As a result, these members usually try to minimize the income portion of their earnings in favor of profit distributions. This is entirely valid as long as your income remains within a reasonable range. If you attempt to reduce your income too much, you will likely trigger an audit.

Continuing our previous example, Sue’s LLC earned $100,000 and spent $10,000 in business expenses last year. Under the S corporation form, Sue would save herself more than $2,000 in payroll taxes. Here’s how things would shake out:

  • Sole Proprietorship – Sue will claim the $100,000 of income and the $10,000 of expenses herself. This will lead to her having $90,000 of taxable income. She will pay the 15.3% self-employment tax on all of it, leading to $13,770 in self-employment taxes.
  • S Corporation – Sue takes a salary of $75,000. Her LLC will pay $10,000 in expenses and send her $15,000 as a corporate profit distribution. Sue and her LLC will pay the full combined 15.3% tax on her salary earnings, coming to $11,475. She will pay no payroll taxes on her profit distribution.

Bottom Line

In most cases, if you do business as an individual or a partnership, you should consider forming an LLC. This corporate form is inexpensive and highly flexible. Unless you anticipate major growth involving external shareholders and outside investment in the future, an LLC is a good way to protect your personal assets.

For an individual operator, the choice to elect S corporation tax status is largely a matter of accounting. If you would save a meaningful amount of money in self-employment taxes, it is likely worth electing S corporation status.

For a partnership, consider the operating requirements of an S corporation carefully. Would it significantly affect your business to adhere to bylaws and corporate governance? Do you have few enough members, and will you likely keep that membership group small? If so, once again, consider whether an S corporation would create enough tax savings to justify the costs of filing and paperwork.

Tips for Managing Your Finances

  • In-depth budgeting is a worthwhile strategy to adopt if you’re looking to improve your long-term finances. It may, however, be difficult to build a budget if you have little to no experience doing so. To get some help, stop by SmartAsset’s budget calculator.
  • Many financial advisors specialize in financial and tax planning for business owners. You can find a financial advisor today using SmartAsset’s financial advisor matching tool. Simply fill out our short questionnaire and you’ll be matched with up to three fiduciary advisors in your area.

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Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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