As the April 15 tax deadline approaches, you may be looking for any deductions that could reduce your liability. And while you may be dismayed to learn that the beloved family pet isn’t considered a dependent, you might have a few extra deductions if you’re a sole proprietor or you paid your taxes with a credit card last year. Don’t overlook these as you prepare your returns.
Deducting business credit card expenses
Business owners, or sole proprietors, are able to deduct both credit card interest and fees on their returns. These fees must have been assessed on a business credit card or a credit card used for business purposes only.
Nerd tip: It’s illegal to put personal expenses on a business card to deduct the interest and fees. Keep your business and personal credit cards separate to make your life easier in case of an IRS audit.
Business interest and fees will be deducted on your Schedule C, which is used for reporting your business profit or loss. These expenses should be listed on the second page of the Schedule C, under “Other Expenses.” Other expenses then will be used to offset your business income.
Avoid paying credit card interest for the sake of tax deductions. You should aim to pay off your entire balance each month so you won’t owe interest on your business purchases.
This is a good rule of thumb for any type of deductible interest you pay, such as mortgage or student loan interest. Pay off debt quickly to avoid paying interest, unless you find that deducting the eligible interest and investing the amount you would’ve prepaid will benefit you more. Crunch the numbers before making a decision.
Deducting personal credit card expenses
Unfortunately, personal credit card expenses — like interest and fees — can’t be deducted. However, you may be able to deduct expenses associated with paying taxes — like credit card convenience fees — on your Schedule A.
Schedule A is used by taxpayers who itemize their deductions, rather than taking the standard deduction. Itemization doesn’t make sense for everyone, and you should only itemize if your deductions — like mortgage interest, charitable contributions and state taxes — exceed the standard deduction.
Starting in 2009, the IRS announced that if you do itemize, you may be able to deduct the previous year’s convenience fees on your return under “Certain Miscellaneous Expenses” on your Schedule A. Certain miscellaneous expenses include unreimbursed employee expenses, tax preparation fees, other tax expenses, safe deposit box fees, investment fees and more.
Keep in mind that you can only deduct this category of expenses if they exceed 2% of your adjusted gross income in total, and only that excess can be deducted. For instance, if the total amount of your miscellaneous expenses add up to 3% of your AGI, only 1% can be deducted.
If you pay your taxes with a credit card, keep records of the fees paid. Next year, you’ll be able to deduct these if you meet the above requirements. This year, deduct last year’s convenience fees if you’re able. Remember that your personal credit card interest and fees — including annual, foreign transaction, and balance transfer fees — can’t be deducted.
Nerd note: Just because you can pay your tax bill with a credit card doesn’t mean you should. Check out our article on three reasons not to pay your taxes with a credit card before you decide whether to put this year’s tax bill on plastic.
Bottom line: Sole proprietors with business credit cards or personal credit cards solely used for business purposes can deduct their interest and fees paid on Schedule C. Consumers can’t deduct credit card interest and fees, but can deduct credit card fees associated with paying a tax bill.
Image via iStock.