Freelancers work hard for their money. With deadlines, client networking, and managing finances, the tax season can be stressful for any self employed individual. But, that doesn’t mean this time of year doesn’t come with a few perks – deductions being one.
At Indy, we want to help freelancers, and understand that bank fees and credit card debt can creep up on anyone. In this article, we’ll explore the eligible business credit card interest deductions for freelancers, and how you can claim for a lower tax bill to keep more of that hard earned cash.
What credit card interest is tax deductible as a freelancer?
As a freelancer or small business owner, you won't be able to eliminate all of your interest payments through tax deduction. However, there are many deductible business expenses that can lower your tax bill. These have been implemented and changed since the Tax Reform Act, so it's worth your time to check again for the tax-exempt income you could claim.
You are eligible to deduct credit card interest payments on your credit card for business purchases, as long as you meet the following requirements per IRS guidelines:
- You are legally liable for paying interest on the debt
- Both the lender and you intend to repay the debt
- You and the lender have a credit-debtor relationship
What expenses are deductible, depends on what you do for work. If you're a freelancer or independent contractor- perhaps delivering packages for DoorDash or a freelance designer - and take out a loan for a legitimate business purpose, the interest charges you pay will be tax deductible.
It's important to note that if you are a freelancer in a partnership, you can only deduct interest relating to your expenses, as you're not liable for the full amount of the business credit card debt.
How to deduct credit card interest tax for business expenses:
Claiming credit card interest deductions is simple. You can claim it on Schedule C, with your other business expenses, under "Interest".
Is personal credit card interest tax deductible?
Unfortunately, any credit card interest earned from a personal use credit card or business credit card for personal expenses is non-deductible and can't be used as a tax write-off.
Under IRS guidelines, only the following interest payments are considered deductible interest:
- Interest on home loans (such as home equity loans and mortgage interest)
- Interest on outstanding student loans
- Interest on borrowed money for investment property
- Any interest for business expenses
All other interest incurred, such as that incurred on personal credit cards, vehicle loans, utility bills, and late or underpaid federal, state, and local income taxes, is considered personal interest.
What if I use the same credit card for personal and business expenses?
Under IRS guidelines, you do need to incur interest or fees as a separate business entity or on a business card to be eligible for the deduction. You can mix business and personal expenses on your personal credit card and still deduct incurred interest and bank fees.
However, you will need to be clear about which costs are business related and which are personal.
Credit card fees on your personal card are not eligible for a deduction, even if you can prove the fees are related to business purposes.
How to deduct personal credit card interest:
Let's say you spent $16,000 on your personal credit card statements this last tax year, paid $1000 in interest, and $3,200 of purchases were business expenses. This means that 20% of your purchases for the year were deductible business expenses. This also means that 20% of your credit card interest payments are tax deductible. In this example, that gets you a $200 deduction ($1000 less 20%).
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Are bank fees tax deductible?
Credit card fees are eligible business expenses. This can include late fees, ATM fees, finance charges, and annual credit card fees.
If you are using a personal credit card for business expenses, you will not be eligible for a tax deduction on your overdraft fees - bank fees are excluded from deductions on personal cards, even if used for business use.
Although it isn't required to have a dedicated business credit card for freelancing, it is recommended if you are finding yourself regularly paying overdraft or credit card fees for business. Try to keep your business and personal expenses separate.
You should consider bank fees as business expenses if they are deemed necessary and happen from the business’ account.
How to deduct bank fees:
Bank fees are filed on Schedule C, like all business expenses, of your tax return, in Line 27a and 10, or 24 if they are travel related.
Bank fees typically fall under "Other expenses" (Line 27a) or "Commissions and fees" (Line 10). If you paid for these expenses whilst travelling for work, you can put them under "Travel" (Line 24a).
How Indy can help
At Indy, we aim to make freelancing simple. Indy's Invoice app, lets you manage your current and future expenses. Our app also helps you keep track of your personal purchases, so you can easily separate your personal and business expenses ready for your tax return.
Our online invoice tools also offer the same services. Sign-up now and try it for yourself!
There's no avoiding credit card interest and fees. However, there are many interest expenses and fees that can be deducted if used for business purposes. From overdraft fees, to business credit card interest, claiming these expenses can significantly reduce your taxable income. Remember, personal credit card interest can only be deducted if the purchase was a business expense.
Credit card interest and bank fees are just some of many eligible deductions for freelancers. You can check out out guide on advertising and marketing expenses considered tax deductible and tax saving tips.
Frequently asked questions (FAQ)
Is car loan interest deductible for business purposes?
If you drive for work, you are eligible to write off the interest on your car loan. This only applies to freelancers or self employed individuals who drive on the job, for example, a freelance mobile hairdresser, for which a car is necessary to conduct business activities. If you only use your car for personal purposes, then interest on auto loans aren't deductible as they are not a business expense. It is considered a personal expense.
You can write off interest from auto loans on Schedule C.
Are student loan interests deductible?
Yes, student loan interests are deductible. Per IRS guidelines, you must meet all of the following requirements to qualify.
- You paid interest on a student loan during the tax year. Both private and federal student loans qualify for the deduction, as long as the money borrowed was used solely to pay eligible higher education costs for yourself, a dependant, or your spouse who was enrolled at least part time in a program leading to a certificate, degree, or another credential from a education institution.
- You must be legally obligated to pay the interest on the loan. You are not allowed to claim a tax deduction on interest paid on someone else's loan unless you are the signer (or co-signer).
- You (or your spouse if you file jointly) can't be a dependant on another person's tax return.
You can write off student loan interests on Form 1040.
Are overdraft fees tax deductible?
If you are using a dedicated business bank account, overdraft fees are eligible for tax deduction for work related purchases.
Suppose you are a freelance designer and you purchased a new design template necessary to conduct your business, but forgot to check your account before swiping your business credit card. You now have a $58 overdraft fee. This is tax-deductible.
As long as the purchase that got you an overdraft fee is necessary and a business expense that benefits the business, you qualify. Getting a new coffee machine for your office space doesn't benefit the business, so an overdraft fee for that purchase won't qualify. But designer software would.
Do business travel expenses qualify as deductible interest?
Under IRS guidelines, the following bank fees are eligible for tax deduction:
- Exchange fees
- Foreign transaction fees
- ATM fees
Again, as long as you are traveling for work, any bank fees that occur are 100% tax deductible.
What about returned item fees?
Bank fees that occur because of returned items are also tax deductible.
For example, let's say you're a freelance author who sold ebooks on Amazon, only to have the readers return them all, resulting in you owing money to the retail giant. You will be able to write this off as a business expense and receive a deduction on the credit card fees.
Are transaction and transfer fees deductible?
Usually, business credit accounts allow a certain amount of deposits, transfers, and transactions free of charge a month. However, once you go beyond the limit, charges are applied.
Since these service charges are necessary for your business, they are eligible for deductions and can be written of on your tax return.
Are maintenance fees deductible?
If your bank charges you a monthly or annual fee for an active account, it is considered a necessary business expense.
Because of this, these fees qualify for tax deduction and can be written off on your tax form.