Can I deduct credit card interest?

June, 02 2020 by Glynis Miller, CPA, MST

Once upon a time, in a tax world unknown to millennials, interest on a credit card was fully deductible without regard to the nature of the items purchased. However, that fairy tale world ended while many of the early millennials were still just babies. The Tax Reform Act of 1986 passed, causing interest on credit cards to be defined as a personal expense and generally no longer deductible. With the loss of the deduction of credit card interest, some taxpayers used the strategy of paying off credit card debt with a home equity loan. The tax code once allowed the interest deduction on a home equity loan if the loan did not exceed $100,000 of liability and fell within the total $1.1 million debt limitation for principal mortgages. For taxpayers, this strategy no longer exists. The Tax Cuts and Jobs Act of 2017 saw the elimination of interest on home equity debt unless the debt was used to buy, build, or substantially improve a principal residence, and the debt does not exceed the $750,000 limitation on mortgages taken out after December 15, 2017.

Where does this leave us today when it comes to deducting credit card interest? Well, interest is simply not deductible if the debt represents items purchased for personal use. When interest paid or accrued for credit card debt is connected to items purchased in the course of a trade or business, it can be deductible. However, this does not mean that 100% of the interest on a company credit card is deductible. Nor does it mean that because a personal credit card was used to purchase trade or business-related items, the interest is 100% nondeductible. It means that accounting for the purchases made by credit card is required to deduct the correct interest charges.

No interest deduction is allowed on credit card debt for personal items charged on a company credit card. Any employee permitted to make personal purchases on a company credit card should repay the company immediately. Employers can then adjust the records for nonbusiness debt.

It is best to use a single personal credit card to purchase solely trade or business items. The use of one card for only trade or business-related purchases reduces time spent accounting for such transactions.

It is crucial to retain the actual receipts for any purchases, regardless of whether charged to a personal or business credit card. The tax code requires support for business expenses. Thus, to have the proof, keep all receipts from business purchases in the accounting records. Retention of receipts provides information that cannot be obtained from a credit card statement alone. Credit card statements simply lack the details required to identify items purchased.

So, while the simple answer to whether you can deduct credit card interest was not so simple, if you maintain the records as you go, it is easier than trying to go back and justify your trade or business purchases after the fact.