Can You Write Off Transaction Fees on Your Taxes?

Transaction fees are charges incurred for various financial activities, from processing payments to managing investments. Understanding their tax implications is important for individuals and businesses to accurately report income and expenses. The ability to deduct these fees on a tax return depends on their nature and the context in which they arise. Not all transaction fees are deductible, and rules vary based on whether the fee is business, investment, or personal.

Identifying Deductible Transaction Fees

Numerous types of transaction fees may be deductible for tax purposes if associated with business or investment activities. Business-related fees are ordinary and necessary expenses for operating a trade or business. These include merchant processing fees from credit card processors. Bank service charges, such as monthly maintenance fees, wire transfer fees, and ATM fees incurred for business purposes, also fall into this category. Payroll processing fees paid to third-party providers are another common deductible business expense.

Investment-related fees involve costs associated with managing or acquiring investments. While historically including brokerage commissions and advisory fees, their deductibility has changed. Real estate transaction costs, or closing costs, are charges incurred when buying or selling property. Some, like loan origination fees (points) and certain real estate taxes, may have specific tax treatments.

Conversely, personal transaction fees are generally not tax-deductible. Examples include ATM fees for personal cash withdrawals, credit card late fees on personal accounts, or balance transfer fees for personal debt. These expenses do not meet the criteria for tax deductibility. The distinction between personal and business use is crucial for determining deductibility.

Deducting Transaction Fees for Businesses

Businesses can claim deductions for transaction fees that are considered ordinary and necessary expenses incurred in carrying on a trade or business. These expenses directly reduce a business’s taxable income. For sole proprietors, these deductions are typically reported on Schedule C (Form 1040), Profit or Loss from Business. Merchant processing fees, such as those paid to credit card processors, are generally listed as a business expense. These can be categorized under “bank fees” or “other expenses” on Schedule C.

Bank service charges, including monthly account fees, transaction fees, and business-related ATM fees, are also deductible. Payroll processing fees, whether for third-party services or software, are considered ordinary and necessary business expenses and are deductible, typically categorized under administrative or general and administrative expenses. Larger entities, such as corporations (Form 1120), S corporations (Form 1120-S), and partnerships (Form 1065), report these transaction fees as operating expenses on their respective tax forms. This treatment allows businesses to reduce their overall tax liability by accounting for the costs of financial operations.

Deducting Transaction Fees for Individuals

Individuals face different rules for deducting transaction fees, particularly those related to investments or real estate. Investment advisory fees and similar expenses, which were previously deductible as miscellaneous itemized deductions subject to a 2% adjusted gross income (AGI) floor, are no longer deductible for federal tax purposes. The Tax Cuts and Jobs Act of 2017 suspended these deductions for tax years 2018 through 2025. This means fees paid to financial advisors, for investment management, or for tax preparation are generally not deductible for individuals during this period.

For real estate transaction costs, the tax treatment varies. Certain closing costs, such as mortgage interest and real estate taxes, can be deductible in the year paid if the taxpayer itemizes deductions. Mortgage points, which are prepaid interest, may also be deductible in the year paid if specific IRS criteria are met. Other closing costs, like appraisal fees, title insurance, and legal fees, are not deductible in the year of purchase but are added to the property’s cost basis. Adding these costs to the basis helps reduce the taxable gain when the property is sold.

Maintaining Records for Deductions

Proper record-keeping is essential for substantiating any claimed transaction fee deductions for both businesses and individuals. Taxpayers must maintain records that clearly show the amount, date, place, and business purpose of each expense. For business expenses, this includes bank statements, credit card statements, invoices, and receipts that detail the nature and amount of the transaction fees. Digital records, such as electronic invoices or scanned receipts, are generally acceptable if they are legible and contain the necessary information.

For investment and real estate transactions, relevant documents include brokerage statements, closing disclosures (like the HUD-1 or Closing Disclosure form), and other statements that indicate fees paid. These records are crucial in case of an audit by the Internal Revenue Service (IRS). Generally, tax records should be kept for at least three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. However, for certain situations, such as underreported income exceeding 25% of gross income, the retention period extends to six years. Records related to property should be kept until the period of limitations expires for the year in which the property is disposed of, as they are needed to determine basis and gain or loss.