Is credit card interest a business deduction?

Hi June,

Thank you for sending the Expense List. I am so glad I found your website.

One of my questions has already been answered from your blog but I have another question that I cannot find the answer to. Can I deduct all of the credit card interest charged to my business credit cards each month, even though most of the interest is for balances from two previous years?

I am sending a check for your book and CD. Thanks for being there for all of us Indie's!

Best regards,
Bonnie


Hello Bonnie,

I, too, am glad you found me. Please tell your indie friends and colleagues. They need all the help they can get in these rough times.


You may deduct credit card interest as a business expense whether you have a business card or personal credit card if and this is a really big if you used the card for a business expense and the finance charge is for that expense. If you use a card for both business and personal expenses then you must allocate the interest expense.

A card used 100% for business since you got the card is easy. All interest is a business deduction.

If you had mixed use then you need to do some arithmetic. Tally the business vs the personal. If 40% were personal then you may deduct 60% of the interest as a business expense. Even if for past business purchases.

Because if you have to go back a couple of years this can take some time then you will need to decide if it is worth the time. A $300 interest charge may not be worth your time to figure out. $15,000 is worth the time for the calculation.

Remember that every $100 business deduction can save you $30 -- more or less -- in taxes.

Also be aware that credit card companies have a lot of names for interest: Late fee; finance charge; late penalty. Interest by any other name is still interest expense.

Best,
June

Business expense purchases made via bank credit card are deductible even tho' unpaid.

Hi June,

I live in Holland, PA, about 15 miles north of Philadelphia. I'm doing the taxes for my boyfriend who started a carpentry business this year in August.

He has put a few expenses and purchased materials on a business credit card. He has not paid off the credit card bill in full, it carries a balance. Can I add up these items and include them as itemized deductions, even if they haven't technically been paid for yet?

Also what do I do with the payments made to the credit card during the year?

Thanks so much, your site is very useful, and I enjoy your writing style.

Best regards,
Karen


Dear Karen,

Any charge made on or before December 31 via a bank credit card is an expense for that year regardless of when the credit card balance is paid. You ignore the amount of payments made on the credit card.

For a store credit card it is a deductible expense in the year it is paid. Your deduction each year is the amount paid on the credit card.

Use your Citibank Mastercard to buy your indie business a computer as a Christmas gift? It's totally deductible in the year you bought it.

Were you to buy that same computer with a BestBuy credit card it is not deductible until you've paid off BestBuy.

Want to know why? Let's say in the first scenario you bought the computer at BestBuy. BestBuy is paid for the computer by Citibank. You owe Citibank the money.

In the second scenario, Best Buy sold you the computer and still owns it until you pay BestBuy the balance.

It's similar to purchasing a home from Harry and Hortense using mortgage financing. Harry and Hortense receive payment for their house from the bank. You get the house but owe the bank the money. If you don't pay the mortgage the bank can take your house. That's what's happening to thousands of people right now who cannot make their mortgage payments.

-- June