While interest on credit cards used for personal expenses is not deductible, interest you pay on charges used for business purposes can be deducted as a business expense on your company's federal tax return.
Credit Card Interest as a Business Expense
If you use a credit card to pay for something that qualifies as a business expense, then any interest you pay on that charge also qualifies as a business expense. You can deduct this interest regardless of whether your business is a corporation, sole proprietorship, partnership or other form of business.
Credit Card Account Considerations
The credit card itself doesn't have to be a business credit card. However, it is best to reserve one card to use only for business purposes - otherwise, figuring out how much of the interest is business-related and how much is personal can get extremely complicated.
For example, you might spend $50 to buy office supplies for your business and $100 on groceries, and put both charges on the same card. The next month you might spend another $75 on business purchases and $25 on personal purchases on the same card. If you left all of these charges on the card for a few months and they accrued interest, it would be very difficult to work out how much of the interest was related to each of the different charges to determine how much of it you could deduct on your tax return.
Tracking Interest Expenditures
Many bookkeeping programs (including QuickBooks) allow you to automatically download transactions from a credit card, including interest charges. If you have a mix of business and personal charges on the card, you'll either need to enter your business charges manually or remove the personal charges from your bookkeeping system.
Business-related interest charges should be entered into your bookkeeping system as 'interest expense' or something similar. Your bookkeeping system probably already has a category by this name. The exact name that you choose for the category doesn't really matter as long as you use it consistently and your bookkeeper or accountant knows what it means.
Cash Versus Accrual
Business owners can choose to use either the cash method or the accrual method when keeping their books. The accounting method you choose will affect how you can deduct business interest from credit cards.
- Cash: If you use the cash accounting method, you can deduct the interest you paid during the year, but you can't deduct charges you haven't paid yet. For example, if a $10 interest charge appears on your credit card in December 2017 and you pay it in January 2018, you can't deduct it from your 2017 taxes. Instead, you will be able to deduct it from your 2018 taxes.
- Accrual: If you use the accrual accounting method, you can deduct interest as it is charged on your card, regardless of when you pay it. In the above example, an accrual method business owner would deduct the interest from his 2017 taxes but not from her 2018 taxes.
Reporting Business Interest
How you report interest on your tax return will depend on the form of your business. Sole proprietorships, partnerships, and corporations all use different forms for their federal tax returns.
Sole proprietors and single-member LLCs report business interest on the Schedule C. For the 2017 version of this form, business credit card interest goes on line 16b.
Corporations use either Form 1120-C (for C corporations) or Form 1120-S (for S corporations) as their primary federal tax return. LLCs may also use one of these forms if they've elected to file taxes as a corporation. On Form 1120-C, business interest deductions go on line 16. On Form 1120-S, business interest deductions go on line 13.
Partnerships and some LLCs use Form 1065 for their federal tax returns. On this form, business interest deductions are reported on line 15.
Capitalization of Interest
One exception to the usual rules about deducting business interest is capitalization of interest. When you make a major purchase for your business, such as a piece of equipment, you can't deduct the entire purchase all at once - instead, the IRS wants you to depreciate the item by breaking out the deduction for it over several years. For example, if you buy a car for your business, you'll typically have to deduct the cost of the car over five years instead of deducting the entire expense in the year you bought it. Expenses that you're required to depreciate are called 'capital expenditures' by the IRS.
Any business interest that you incur as part of a capital expenditure also has to be depreciated, at the same rate that you depreciate the capital expense. For example, if you buy a business car that you depreciate over five years, the interest you pay on the car loan will also have to be depreciated over five years. It's unlikely that you'd put such a large expense on your credit card, but if you did, then the credit card interest would have to be depreciated at the same rate as the item you purchased.
Being able to deduct interest for business related credit card charges is helpful, but it's still better to not have to pay interest at all. Try to pay off your credit cards every month before interest charges apply, and you'll save even more money.
Business tax returns can get very complicated, especially for corporations, so it's best to hire a tax professional to prepare your return for you. Doing so can likely save you more on your taxes than the cost of professional service fees, and can also provide the benefit of peace of mind.