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When Your Credit Card Debt Is Tax-Deductible

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Wouldn't it be nice if you could deduct your credit card debt from your taxes? For most Americans, that's just a dream that will never come true. However, some circumstances allow you to deduct some credit card debt — if your card is being used for business purposses.

The 2017 Tax Cuts and Jobs Act raised the standard deduction and eliminated or reduced certain itemized deductions as part of a tax simplification effort. It's critical for those who still itemize to take advantage of all possible deductions. Self-employed taxpayers and small business owners who rely heavily on credit cards may be able to save by taking advantage of credit-related deductions.

Credit card debt on personal purchases is not tax-deductible, thanks to the 1986 Tax Reform Act. However, three varieties of business-related credit card debt may be deductible.

Interest on credit card transactions used solely for business purposes may be deducted as long as three criteria are met. You have to be legally liable for the debt, you must have a legitimate creditor-debtor relationship with the lender, and both parties must intend for repayment of the debt. These restrictions prevent sham transactions that falsely build deductions (along with other legally questionable benefits).

You must be able to verify that underlying expense was for business purposes only and deduct only the amount of interest that relates to your portion of the debt. For example, if you're a partner in a business and a particular expense was incurred by the partnership, the partnership is liable for the debt — not you personally. You can only deduct the interest that's proportionate to your partnership share.

Any fee associated with a business-related credit card may be deductible, including late fees and interest charges. Annual credit card fees are deductible as well. Transactions fees like ATM fees or foreign transaction fees also fit the deduction criteria.

The final category is merchant fees: the fees that businesses pay to credit card companies for processing credit card transactions. Merchant fees incurred as a part of doing business are deductible, and they can be substantial. Average credit card processing fees tend to be in the 2-2.5% range per transaction and may be higher for online businesses and other ventures where the physical card is not used.

If you're mixing personal and business expenses on your personal credit card, you must keep meticulous records to avoid raising red flags with your return. Generally, it's best to get a business credit card to keep your expenses clearly separate.

Want to try to maximize rewards by lumping both business and personal expenses together? Be prepared to handle the accounting challenges. Are you planning to reinvest the rewards you earn from blended expenses back into your business? Expect even greater accounting challenges.

If you've incurred interest or fees on your business-related credit card expenses, you might as well take advantage of any money-saving deductions they provide. However, there's a better way to save money. Pay all of your business-related credit card bills on time and in full every month, using credit cards that charge as few fees as possible.

In most cases, longer-term expenses can be financed at a far lower interest rate than the average credit card annual percentage rate (APR). Why overextend your credit cards? Interest charges and fees will probably swamp your rewards, and the amount you save on your taxes through deductions probably won't make up the difference.

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The Credit Question: How Big Of A Role Does A Credit Score Play In Small Business Lending?

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: contributor contributors taxesPersonal Finance

 

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