Can You Write Off Credit Card Interest for a Small Business?

Small business owners must understand which expenses can reduce their tax liability. Tax deductions lower a business’s taxable income. A common question for entrepreneurs involves the deductibility of interest paid on credit cards used for business activities. While personal credit card interest is not deductible, specific rules apply when these financial tools are used for legitimate business purposes.

Determining Deductible Credit Card Interest

The Internal Revenue Service (IRS) permits the deduction of interest on debt when funds are used for business purposes. This principle extends to credit card interest, provided expenses meet the IRS criteria of being “ordinary and necessary” business expenses. An “ordinary” expense is common and accepted in your trade or business, while a “necessary” expense is helpful and appropriate for your business, even if not indispensable.

For credit card interest to be deductible, charges must be directly connected to your business operations. This includes interest on purchases for inventory, supplies, operational costs, and other expenditures that support business functions, such as travel, marketing, or professional services. However, interest incurred on personal draws, non-business related purchases, or certain penalties and annual fees generally do not qualify for a deduction.

A distinction arises when a credit card is used for both business and personal expenses. For mixed-use scenarios, only the portion of interest directly attributable to business-related transactions is deductible. The IRS employs “tracing” rules to determine if the interest is truly business-related, based on how the borrowed funds were actually used. Therefore, maintaining clear separation between business and personal expenditures is important to accurately claim deductions.

Essential Record-Keeping for Credit Card Interest

Accurate and meticulous record-keeping is important for small business owners seeking to deduct credit card interest. Proper documentation substantiates the “ordinary and necessary” nature of expenses and their direct link to business activities. This organized approach helps ensure compliance with IRS requirements and can prevent complications during an audit.

A best practice involves using a separate, dedicated business credit card exclusively for all business expenses. This clear segregation simplifies tracking and provides a straightforward audit trail for interest and other charges. If a personal credit card must be used for business, meticulously document and separate each business transaction from personal ones, clearly identifying the business purpose for each charge.

The types of records to maintain include monthly credit card statements, detailed receipts for every purchase made with the card, and entries in accounting software that categorize each expense. These documents serve as proof of payment, the business reason for the expense, the date incurred, and the payee. The IRS advises retaining tax records, including supporting documents, for at least three years.

Reporting Credit Card Interest on Tax Returns

Once deductible credit card interest has been determined and properly documented, the next step is accurately reporting it on the appropriate tax forms. The specific form used depends on the small business’s legal structure. This reporting reduces the business’s taxable income by the amount of qualified interest paid.

For sole proprietors and single-member LLCs treated as disregarded entities for tax purposes, deductible credit card interest is typically reported on Schedule C (Form 1040), Profit or Loss from Business. This expense is usually entered on the line designated for interest paid.

Partnerships and multi-member LLCs, which are generally taxed as partnerships, report their interest expense on Form 1065, U.S. Return of Partnership Income. The interest deduction is taken at the partnership level, often on Line 15, and then flows through to individual partners via Schedule K-1 (Form 1065). Each partner uses their Schedule K-1 to report their share of the partnership’s income, deductions, and credits on their personal tax return.

S Corporations report their business interest expense on Form 1120-S, U.S. Income Tax Return for an S Corporation. Similar to partnerships, S Corporations are pass-through entities, meaning profits and losses pass through to shareholders who report them on their individual tax returns. C Corporations, taxed as separate entities, report their business credit card interest on Form 1120, U.S. Corporation Income Tax Return.