Are Credit Card Processing Fees Tax Deductible?

Credit card processing fees are a common cost for businesses that accept this form of payment. These fees are generally tax-deductible, provided they meet specific criteria set by the Internal Revenue Service (IRS). For business owners, understanding how to properly account for and deduct these expenses is a part of accurate financial management and tax reporting. The fees reduce a business’s taxable income, which can result in tax savings.

The Business Expense Requirement

For any expense to be deductible, the IRS requires that it be both “ordinary and necessary” for conducting your trade or business. An ordinary expense is one that is common and accepted in your type of business. A necessary expense is one that is helpful and appropriate for your business. Credit card processing fees fit this definition because accepting credit and debit cards is a standard practice for most businesses, and incurring the associated fees is a part of offering that payment option.

The distinction for deductibility lies in separating business expenses from personal ones. If a business owner uses a single bank account for both business income and personal spending, only the portion of fees related to business transactions can be deducted. The IRS permits deductions for expenses directly tied to generating income, so only processing fees on customer payments qualify. Maintaining separate bank accounts for business and personal use is a recommended practice to simplify record-keeping.

Identifying and Calculating Your Total Deduction

To claim the deduction, you must first determine the total amount of processing fees paid during the tax year. These costs are not a single charge but are composed of several distinct fees. The most significant is typically the interchange fee, which is paid to the customer’s card-issuing bank. Other charges include assessment fees paid to the card networks like Visa or Mastercard, and markups or service fees charged by your specific payment processor, such as Stripe, Square, or PayPal.

This information is detailed in your monthly merchant statements or available through your payment processor’s online dashboard. These statements break down your sales volume and list the various fees deducted from your revenue. You may also encounter other deductible costs, such as monthly account fees, terminal lease payments if you rent equipment, or chargeback fees. It is important to review these documents carefully to identify every eligible expense.

The calculation process involves summing up all processing-related fees from every statement for the entire tax year. For a business operating on a calendar year basis, this means gathering the statements from January through December. You must add the total fees from each month to arrive at a single, annual figure. This final number is the total deduction amount you will use when preparing your tax return. Retain all statements as proof of your expenses.

How to Report the Deduction on Tax Forms

Once you have calculated your total deductible credit card processing fees for the year, the next step is to report this amount on the correct tax form. The specific form and line number depend on your business’s legal structure. The reporting location varies by business type:

• For sole proprietors and single-member LLCs who file a Schedule C (Form 1040), Profit or Loss from Business, these costs are reported in Part II, “Expenses,” on the line for “Commissions and fees.”
• Partnerships filing Form 1065, U.S. Return of Partnership Income, will report these expenses under “Other deductions,” where they are itemized on an attached statement.
• S corporations filing Form 1120-S, U.S. Income Tax Return for an S Corporation, report the total under “Other deductions.”
• C corporations using Form 1120, U.S. Corporation Income Tax Return, will also report the amount on the line for “Other deductions.”