Can You Deduct Credit Card Interest for Business?

Business owners often wonder if credit card interest can be deducted for tax purposes. Business expenses are generally deductible if they are both ordinary and necessary for the operation of a trade or business. Interest paid on credit cards used for business purposes can indeed be deductible under specific conditions.

This deduction is permitted by the Internal Revenue Service (IRS) as long as the interest is directly tied to legitimate business purchases. The ability to deduct this interest applies to various business structures, including sole proprietorships, single-member LLCs, partnerships, and corporations. Understanding the rules for this deduction is important for maximizing tax benefits.

Understanding Qualifying Business Interest

The deductibility of interest hinges on the “tracing rule,” which means the use of the borrowed funds, not the type of loan or collateral, determines whether the interest is deductible. Debt and its associated interest are allocated based on how the loan proceeds are spent. For instance, interest on a loan used for business expenditures is deductible, while interest on a loan for personal expenses is not.

This rule clarifies that interest on a personal credit card can be deductible if the charges were strictly for business purposes. Conversely, if a business credit card is used for personal expenses, the interest attributable to those personal charges is not deductible. Personal credit card interest has not been deductible since the Tax Reform Act of 1986.

Examples of expenses that generate deductible interest include purchases of inventory, office supplies, marketing expenses, professional services, and operating costs. Any interest paid on legitimate business charges, such as those for travel or business utilities, can be deducted. However, late payment fees and penalties on credit cards are not deductible business expenses.

To calculate the deductible portion, especially for mixed-use cards, you must determine the percentage of expenses that are business-related and apply that percentage to the total interest paid. For example, if 70% of a credit card balance is for business expenses, then 70% of the interest paid on that balance would be deductible.

Important Rules for Interest Deductions

A significant rule involves “capitalized interest,” which applies when interest is incurred to acquire or construct certain capital assets. Instead of being immediately expensed, this interest must be added to the asset’s cost basis. For instance, if a business borrows funds to construct a new building, the interest paid during the construction period generally must be capitalized.

This capitalization is required under IRC Section 263A for “designated property,” which includes real property and certain tangible personal property with a long depreciable life or a long production period. Once capitalized, this interest is recovered through depreciation, amortization, or as part of the cost of goods sold when the asset is placed in service or sold. Small business taxpayers with average annual gross receipts of $25 million or less (indexed for inflation) are generally exempt from these capitalization rules.

The Tax Cuts and Jobs Act (TCJA) introduced a limitation on the deduction for business interest expense under Section 163. For most taxpayers, the deduction for business interest is limited to the sum of business interest income plus 30% of the business’s adjusted taxable income. This limitation applies at the entity level for S corporations and partnerships, and any disallowed interest can typically be carried forward to succeeding tax years.

Record Keeping and Tax Reporting

Meticulous record-keeping is necessary to substantiate credit card interest deductions for business. You should retain credit card statements, receipts, and invoices for all business-related purchases. These records should clearly link each expense to its business purpose, providing a robust audit trail for the IRS.

Using dedicated business credit cards and separate business bank accounts greatly simplifies this process. This separation helps avoid the complexities of allocating interest between business and personal use on mixed-use cards. Maintaining distinct financial accounts ensures that all business income and expenses are clearly delineated, making tax preparation more straightforward.

The reporting method for business credit card interest depends on your business structure. Sole proprietors and single-member LLCs typically report this deduction on Schedule C (Form 1040), Profit or Loss from Business. On Schedule C, deductible interest is reported on Line 16b, labeled “Interest.”

Corporations, including C corporations, report business interest expense on Form 1120, U.S. Corporation Income Tax Return. S corporations, which are pass-through entities, report interest expenses on Form 1120-S, U.S. Income Tax Return for an S Corporation. Partnerships use Form 1065, U.S. Return of Partnership Income, to report their business interest deductions. These forms include specific lines for interest expense, ensuring proper categorization and reporting of this deduction.