Find out what credit card processing fees are tax deductible, along with who can deduct them and how.
“Nothing is certain except death and taxes,” wrote founding father Benjamin Franklin back in 1789.
Over 230 years later, the same statement proves just as truthful: taxes are an inevitability. Avoid them, and you’ll regret it.
However, that’s not to say everyone pays the same taxes. Depending on circumstances, some wisely make use of deductions to reduce what’s owed to Uncle Sam. Is that the case with credit card processing fees?
Let’s find out.
Can an individual deduct credit card processing fees?
In short: no, an individual can’t deduct credit card processing fees.
There used to be options to do this, but that all changed a few years ago.
Back in 2018, a major overhaul of the tax rules took place. In fact, it was the biggest change to tax rules in 30 years. This overhaul happened under the Tax Cuts and Jobs Act, or TCJA.
This led to huge changes in how both individuals and businesses filed their taxes—including what deductions are now permitted for individuals.
In summary, it eliminated many itemized deductions that taxpayers could make use of before. This change included the one transaction cost that was deductible: credit card payments made to the IRS.
However, the rules on what an individual can deduct and what a business can deduct are worlds apart. Read on to find out how.
Can a business deduct credit card processing fees?
If you’re downhearted to learn that individuals can’t deduct processing fees, there’s good news to cheer you up: businesses can make deductions that individuals can’t.
To stimulate economic activity, the United States Government allows for a wide range of deductions for businesses. These include a large number of credit card processing fees.
Why are they deductible for businesses? It comes down to what the IRS calls “ordinary” and “necessary” expenses. An expense needs to fall under both ordinary and necessary to be tax deductible.
The IRS defines an ordinary expense as “one that is common and accepted in your trade or business”, while a necessary expense is “one that is helpful and appropriate for your trade or business.” It’s important to note that an expense does not have to be indispensable to be considered necessary.
This is why credit card processing fees are deductible: businesses of all sizes widely accept credit cards, which makes the costs associated with accepting them an ordinary fee.
And because credit card payments have become so commonplace, they have become necessary for virtually all businesses, which allows them to fall under the “necessary” category.
Now that we know businesses can deduct processing fees, the all-important question still remains: Which processing fees are tax deductible? We’ll cover that next.
What credit card processing fees are tax deductible?
There’s roughly 495,000 tax accountants in the United States, and all of them are employed for basically one reason: because taxes are complicated.
Rules, updates, thresholds, etc change from year to year, and vary from one entity to another.
Fortunately, those changes usually apply to matters not affecting processing fees. Going back to the “ordinary” and “necessary” rule about deductions, we know deductions for fees from credit card processing still apply. That part won’t change without the ordinary/necessary rule changing.
With that in mind, a business can deduct the following fees associated with accepting credit cards:
- Monthly Service Fees
- PCI Compliance Fees
- Voice Authorization Fees
- Service and Acceptance Fees
- Address Verification Service Fees
- Chargeback Fees
- Retrieval Request Fees
- Batch Fees
- POS Software Fees
- Monthly Minimum Fees
- Non-Sufficient Funds Fee
- Payment Gateway Fee
This is not an exhaustive list of the credit card processing fees businesses can deduct. Why not?
Because this list will vary from business to business. The fact is, what you pay to process credit cards will vary greatly from what the next business pays.
Payment processors have different fees, depending on the customer and how scrupulous the processor is. Read our article to see what merchant service fees you can avoid to save your business money and not just deductions from your taxes.
If you’re still not sure what fees you can deduct, don’t worry. A simple rule of thumb is any legitimate fees associated with your business accepting credit cards will be deductible. So take a look at what you’re paying to process credit cards to know what’s tax deductible.
Now that we have what fees are deductible, there still is one last important piece of the puzzle to establish: What should you do to deduct them? We’ll cover that next.
How to deduct processing credit card fees
Getting back to that list of what you’re paying: how much is it?
Take note of this amount from the beginning to the end of the year and make detailed records of it. It will prove handy when it comes to actually listing the deductions as you file your taxes.
There are different ways of using this information to make sure you get your tax deduction.
Where you list this depends on whether you do your taxes yourself or you hire an accountant, along with the configuration of your business. For example, corporations file Form 1120 while other businesses normally use Schedule C.
These expenses fall under the category of “miscellaneous expenses”, where you’ll be allowed to describe them as “credit card processing fees”.
Having an accountant who can expertly navigate the tax rules will be a great advantage for any business owner who wants to make sure they get every deduction allowed.
Taxes can be complicated. Fortunately, it’s not confusing to know if you can deduct credit card processing fees: yes if you’re a business, no if you’re an individual.
Making sure you have the right payment processor that’s not charging you too many fees is the best approach to saving money. After all, it’s better to save on fees to begin with compared with deducting fees on your taxes.
Want to know more about how you can save money on processing fees? Take a look at the PPS blog and discover what savings tips you’ve been missing.