Are Bank Service Charges Tax Deductible?
Understand the criteria for deducting bank fees, which hinge on an account's purpose and recent changes to tax law affecting personal expenses.
Financial institutions charge fees, often called bank service charges, for many account services. Examples include monthly maintenance fees, overdraft fees for transactions that exceed the available balance, and wire transfer fees. Other charges can be for ATM usage, check printing, and receiving paper statements.
Deductibility for Business Accounts
Bank service charges incurred through a dedicated business bank account are tax-deductible. The Internal Revenue Service (IRS) permits the deduction of expenses that are both “ordinary and necessary” for conducting a business. An ordinary expense is common in your industry, while a necessary expense is helpful and appropriate for your business. Bank fees fit this description as a standard cost of managing business finances.
This principle applies across various business structures, including sole proprietorships, partnerships, and corporations. Deductible charges include monthly account maintenance fees, wire transfer fees for paying vendors, and overdraft fees that occur during business operations. Fees for processing customer credit card payments and charges for ATM withdrawals for business cash are also deductible.
To claim these deductions, the fees must be associated with an account used exclusively for business activities. Maintaining a separate bank account for your business simplifies record-keeping and substantiates that the expenses are strictly business-related. This separation helps avoid issues during a potential audit.
Limitations on Personal Account Fees
Bank service charges incurred on a personal account are not tax-deductible. The IRS classifies these costs as personal, living, or family expenses, which are nondeductible. This rule applies even if some business-related transactions are conducted through the personal account, as the expense must be directly tied to a business activity to qualify.
A change affecting this area was the Tax Cuts and Jobs Act (TCJA) of 2017, which suspended the deduction for miscellaneous itemized expenses for tax years 2018 through 2025. This category previously included expenses like investment advisory fees, custodial fees for IRA accounts, and fees for tax preparation. As a result, these fees for managing personal investments are no longer deductible for individuals.
How to Claim the Deduction
To claim a deduction for bank service charges, you must accurately track and total all eligible fees. The most direct way to do this is by reviewing your monthly business bank statements, which itemize each fee. You must maintain these statements as part of your financial records to substantiate the expenses.
For sole proprietors and single-member LLCs, these deductible bank fees are reported on Schedule C (Form 1040), Profit or Loss from Business. The total amount is entered in Part II, “Expenses.” A common practice is to list bank charges on Line 27a, “Other expenses,” and specify “Bank Fees.” Businesses structured as partnerships or corporations report these fees on their respective tax forms, such as Form 1065 or Form 1120.
If you use a single bank account for both business and personal transactions, the calculation is more complex. In this mixed-use scenario, you cannot deduct the full amount of the bank fees. You must determine the percentage of account activity that was for business purposes and apply that percentage to the total fees to find the deductible portion. For example, if 60% of transactions were business-related, you could deduct 60% of the monthly service fees.