If you are a small business owner, it is likely that you dread tax time. The tax code is highly complex when it comes to your business expenses and the tax deductions that your business can take. It is important that you don’t miss available deductions because out of every $100 in deductions, your business will save an average of $30. A very substantial expense for most small businesses is the credit card interest that they pay each month. There are times when the law allows you to take a deduction for the interest that your business pays and situations in which a deduction is not allowed.
When credit card interest can be deducted
The interest that is business-related is deductible on your taxes. For example, the interest that you pay on credit card debts and business loans can be deducted if the incurred debts are related to the activities of your business. You are even allowed to deduct the interest that you pay for cash advances if the money was then used for your business. You are only allowed to take a deduction for interest in the year in which your business paid it. The interest that might be deductible might include ATM fees, late fees, finance charges, annual fees, foreign transaction fees and others. In order to take advantage of these deductions, you will need to save all of the relevant credit card statements and receipts to make filing your taxes easier.
When can businesses not deduct credit card interest?
Before the Tax Reform Act was passed in 1986, taking a credit card interest deduction was fairly straightforward. All interest that was paid was deductible even if it was associated with non-business expenses and personal credit cards. Since the law was passed, you are no longer able to deduct interest on your personal debts in order to reduce your taxable income. If you use a personal credit card to pay for business expenses, you will need to keep thorough records and to review them carefully to figure out which expenses were business-related and which ones were not. When you do this, you will then need to calculate the percentage of your total interest payments that you can allocate to your business so that you can take the appropriate deductions.
Steps to make the process easier
There are several steps that you can implement to make filing your returns easier. You can start by maintaining a credit card for your business that is separate from your personal credit cards. This will not only make it easier for you to calculate the interest that you spent for your business-related purposes, it will also allow you to have access to the benefits and rewards that are offered by many business cards. A business credit card may also help your business to build an excellent credit history so that you can secure lower interest rates in the future.
Claiming deductions for your business expenses is important for small business owners. If you do not maximize the deductions that you can take, you are simply losing money. To learn more about your business’s taxes and the deductions that you might take, contact us today by leaving your information in our contact form.