Can You Write Off Bank Fees on Your Taxes?

Bank fees can add up over time, leading many to wonder if they can be deducted on their taxes. Some fees may qualify for deductions, depending on the type of account and its purpose. Understanding which expenses are eligible can help reduce taxable income.

Tax rules distinguish between business and personal accounts when determining deductibility. Proper documentation is essential to support any claimed deductions.

Types of Bank Fees That May Be Deductible

Not all bank charges qualify, but certain fees related to earning income or managing a business may be deductible.

Monthly Maintenance Fees

Banks often charge a recurring fee to maintain an account. For business accounts, these fees are generally deductible as an ordinary and necessary expense under the Internal Revenue Code. This applies whether the fee is a flat monthly charge or varies based on account activity.

For example, if a business checking account incurs a $15 monthly maintenance fee, the total of $180 for the year can be deducted. However, fees for personal accounts are not deductible unless the account is used exclusively for business. Self-employed individuals using a personal account solely for business must maintain clear records to support the deduction.

Transaction Fees

Banks impose charges on specific transactions such as wire transfers, ATM withdrawals, and foreign currency exchanges. If these fees occur while conducting business, they typically qualify as deductible expenses.

For instance, a company that wires money to suppliers may accumulate substantial fees over the year, which can be deducted as part of business banking costs. A self-employed freelancer withdrawing cash from an ATM to pay for business expenses may also deduct the related fees, provided records link the transaction to their business. Transaction charges related to personal activities do not qualify. Keeping detailed records is essential.

Overdraft Fees

When an account balance falls below zero, banks charge an overdraft fee. In business banking, these fees can be deducted if they are incurred in the normal course of operations. For example, if a small business overdraws its account while paying suppliers, the resulting charge may be considered a necessary cost of doing business.

However, frequent overdrafts may draw IRS scrutiny, as they could indicate poor financial management. Overdraft fees on personal accounts are not deductible, even if the account holder occasionally uses the funds for work-related purposes. Businesses relying on overdraft protection should review cash flow strategies to minimize unnecessary costs.

Differences Between Business and Personal Accounts

The IRS treats business and personal accounts differently for tax deductions. Business expenses must be directly tied to generating income, making it easier to justify deductions for banking fees. Business accounts should be used solely for company transactions, while personal accounts generally do not qualify unless used exclusively for business.

Maintaining a dedicated business account simplifies tax reporting. The IRS scrutinizes deductions from mixed-use accounts, as commingling personal and business funds makes it harder to prove which expenses are business-related. A sole proprietor using a personal checking account for both household and business expenses may struggle to justify deductions, even if some transactions are legitimate business costs.

Business accounts also offer features that personal accounts do not, such as merchant services, higher transaction limits, and specialized reporting tools. These benefits support operational efficiency and strengthen the case for deducting associated fees. Additionally, certain business structures, such as LLCs and corporations, are legally required to maintain separate accounts to preserve liability protection. Failing to do so could result in courts disregarding the business structure and holding owners personally liable for company debts.

How to Document Fees for Tax Purposes

Tracking bank fees for tax deductions requires maintaining organized financial records that demonstrate their connection to business activities. The IRS expects taxpayers to provide supporting documentation, making bank statements, invoices, and receipts essential for substantiating deductions. Listing fees on a tax return without proper records increases the likelihood of an audit.

A well-structured recordkeeping system should include bank statements and transaction logs specifying the purpose of each fee. Accounting software like QuickBooks, Xero, or Wave can automate this process by categorizing expenses and generating reports that align with IRS requirements. Businesses processing high volumes of transactions should reconcile accounts monthly to ensure no deductible fees are overlooked.

Supporting documentation should also include agreements or correspondence with the bank that clarify fee structures. If a business incurs charges for exceeding a transaction limit, having a copy of the account terms can help justify why those fees were necessary. If fees are bundled with other banking services, breaking down the costs and identifying the deductible portion is important to avoid misreporting expenses.

When Fees May Not Qualify

Certain bank fees may seem deductible but fail to meet IRS criteria due to their classification or the nature of the account. Fees tied to personal banking services, even if indirectly connected to business activities, typically do not qualify. For example, charges for maintaining a personal savings account, even if occasionally used to transfer funds to a business, are considered non-deductible because the primary purpose of the account is personal wealth management rather than income generation.

Some financial penalties imposed by banks also fall outside deductible expenses. The IRS prohibits deductions for penalties and fines paid to financial institutions. This includes fees for early withdrawal of certificates of deposit (CDs), as these are considered a consequence of a voluntary contractual agreement rather than a necessary business expense. Similarly, insufficient funds (NSF) fees charged for bounced checks do not qualify, as they result from mismanagement rather than an ordinary cost of doing business.