Is credit card interest tax deductible? The answer to this post is simple, but in order to learn about it and much other relatable information, you will need to continue reading the content of this post.
Is Credit Card Interest Tax Deductible
Yes, you can deduct credit card interest on business expenses but however not personal expenses. It rarely really makes sense to incur credit card interest just for the tax benefit, but you just may get to enjoy significant deductions for interest that you had planned to pay anyway. This article explains the rules for deducting credit card interest as well as where to claim the deduction.
You should know that the deductibility of credit card interest directly depends on the purpose of the underlying purchases. Interest on trade or business expenses in question is deductible while interest on personal expenses on the other hand is not.
The very type of credit card that is used doesn’t matter. Interest on a personal credit card can also be deducted if it is used for a business expense. Conversely, interest on a business credit card does not really qualify for a deduction in the event that it is used for personal expenses.
Individuals that are self-employed and independent contractors can effectively deduct credit card interest on their trade or business expenses even if they don’t have a separate business entity to their name.
Rules for Deducting Credit Card Interest
Keeping separate personal and business credit cards and only making use of each for its intended purpose effectively makes calculating deductible interest much easier. However, owners of small businesses at most times make use of a personal card for business expenses or even charge an incidental personal expense to their business card. In this very case, you should allocate the interest between amounts that are paid on balances for business expenses as well as amounts that are paid on balances for personal expenses.
For instance, assume a starting balance of zero, $6,000 of personal expenses, and then $4,000 of business expenses. If the cardholder in question then later pays interest of $1,000 just before agreeing to pay off the balance in full and without making any other acquisitions they could get to deduct $400. The 40% of the interest that is deductible matches directly with the 40% portion of interest for business expenses. This very type of allocation however can become very difficult for a card with a revolving balance as well as frequent purchases.
Other types of credit card fees that can also qualify for a deduction are based on the amount and the time borrowed. This in question can include cash, check, and even overdraft advances, but however depending on how the specific credit card structures the payment. Flat-rate service charges on personal cards as you should know do not qualify, but service charges on business cards on the other hand do qualify, provided that you make use of the card in a business setting.
Putting an otherwise deductible personal item directly on a credit card does not really make the credit card interest deductible. For instance, you can usually deduct interest on student loans which as you should already know is a personal expense. However, if you get to transfer a student loan balance to a credit card and then incur credit card interest, that very interest in question becomes non-deductible.
Prepaid interest which is a very rare situation for credit cards only just qualifies in the year that it is applied, and not the year paid.
How to Deduct Credit Card Interest on Your Tax Return
For independent contractors in question as well as others without a separate business entity, credit card interest goes directly on line 16b of Schedule C, which as you should know is filed with Form 1040.
Partnerships however report credit card interest on line 15 of Form 1065. And LLCs usually file the very same tax forms as partnerships, although many exceptions literally exist. S corporations on the other hand deduct credit card interest on line 13 of Form 1120-S. Partnerships, S corps, and LLCs are all taxed like either receives pass-through tax treatment, thus meaning that the interest deduction will eventually end up on the individual tax returns of the owner.
C corporations on the other hand report credit card interest on line 18 of Form 1120. C corporations however pay tax directly, so the interest deduction in question does not flow through to owners.
Business owners as well as self-employed individuals may not know that they can also deduct credit card interest for business expenses, and even on a personal card. Allocating interest between business and personal expenses very carefully can help you to claim a significant deduction. However, you should know that separating personal and business cards will make it very much simpler to deduct business credit card interest.
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