Can I Deduct Business Credit Card Interest?

August, 22 2022 by Steve Banner, EA, MBA

Yes, you can indeed deduct business credit card interest – and you can also deduct personal credit card interest. I know this statement probably sounds too good to be true – and that’s because it is too good to be true. Please allow me to explain.

Interest expenses for purchases on a credit card are deductible if those interest expenses are related to purchases for a business. This applies to all types of credit cards, regardless of whether the cards are in the name of a business or in the name of an individual.

On the other hand, interest expenses for purchases on a credit card are not deductible if those interest expenses are related to purchases for personal use. Once again, this applies to all types of credit cards, whether the cards are in the name of a business or an individual.

Now that we have made this distinction between business and personal expenses, we should clarify and reword our opening statement. It would be more accurate to say: “Yes, you can deduct interest on your business and personal credit cards to the extent that the interest relates to business expenses.”

This means that you may have to do some fancy financial footwork if you are charged interest on the personal credit card that you have used for mixed purposes during the month. In a case like that, you would need to divide the total interest charges between your personal purchases and your business purchases. The part of the interest that relates to your business is deductible, but the personal part is not. The same thing applies if you use your business credit card for both personal and business items during the month.

Although the IRS rules do not require you to have a business credit card, life (and accounting) will be much simpler for you if you set aside one of your existing personal cards for business use only. Or, even better, get a completely new card and dedicate it to that purpose. Provided you do not use each card for mixed purposes, you will now have a much clearer view of your deductible business expenses. Many companies that offer business credit cards also provide itemized statements and year-end account reports. These reports can break your business expenses into different categories and make it easier to see how much you have been billed in interest.

And speaking of your business expenses, I also wanted to remind you that you may only deduct those expenses that are “ordinary and necessary” for the operation of your business. An “ordinary” expense is an expense that is common and accepted in the taxpayer’s line of work, such as the costs of operating the truck a plumber uses for work. A “necessary” expense is an expense that is helpful and appropriate for the taxpayer’s trade or business, such as the tools and supplies that the plumber uses every day on the job.

For example, our plumber might prefer that his customers provide a substantial down payment before he starts work on their particular job. This allows him to buy the necessary supplies to get started – but even so, he may sometimes find himself unable to pay his business credit card bill in full at the end of the month. The resulting interest that shows up on his credit card as a result would be an ordinary part of his business operations because of the normal and expected fluctuations in his monthly cash flow. Paying the interest is also a necessary part of his business operation as he must remain in good standing with the banks so he can maintain access to the credit lines he needs to run his business.

As we have seen, credit card interest related to business expenses is generally deductible, regardless of the name on the card. The only exception is when the credit card used by the business operator is in the name of another person. In this case, the interest is not deductible because it is the owner of the other card who is liable for the debt, and not the business operator. So, when I said earlier that you could designate a personal card and use it only for business, just make sure that card is in your name and not your neighbor’s!