You can deduct credit card interest on business expenses but not personal expenses. It rarely makes sense to incur credit card interest just for the tax benefit, but you may enjoy significant deductions for interest you planned to pay anyway. This primer explains the rules for deducting credit card interest and where to claim the deduction.
When Is Credit Card Interest Tax Deductible?
The deductibility of credit card interest depends on the purpose of the underlying purchases. Interest on trade or business expenses is deductible while interest on personal expenses is not.
The type of credit card used doesn't matter. Interest on a personal credit card can be deducted if used for a business expense. Conversely, interest on a business credit card doesn't qualify for a deduction if used for personal expenses.
Self-employed individuals and independent contractors can deduct credit card interest on their trade or business expenses even if they don't have a separate business entity.
Rules for Deducting Credit Card Interest
Keeping separate personal and business credit cards—and only using each for its intended purpose—makes calculating deductible interest much easier. However, small business owners sometimes use a personal card for business expenses or charge an incidental personal expense to their business card. In this case, allocate the interest between amounts paid on balances for business expenses and amounts paid on balances for personal expenses.
For example, assume a starting balance of zero, $6,000 of personal expenses, and $4,000 of business expenses. If the cardholder later pays interest of $1,000 before paying off the balance in full—and without making any other purchases—they could deduct $400. The 40% of interest deductible matches the 40% portion of interest for business expenses. However, this allocation can become very difficult for a card with a revolving balance and frequent purchases.
Other types of credit card fees that qualify for a deduction are based on the amount and time borrowed. This can include cash, check, and overdraft advances, depending on how the specific credit card structures the payment. Flat-rate service charges on personal cards do not qualify, but service charges on business cards do qualify—provided you use the card in a business.
Putting an otherwise deductible personal item on a credit card does not make the credit card interest deductible. For example, you can usually deduct interest on student loans—a personal expense. However, if you transfer a student loan balance to a credit card and then incur credit card interest, that interest becomes non-deductible.
Prepaid interest—a rare situation for credit cards—only qualifies in the year applied, not the year paid.
How to Deduct Credit Card Interest on Your Tax Return
Deduct credit card interest on the relevant line of the trade or business's tax return.
For independent contractors and others without a separate business entity, credit card interest goes on line 16b of Schedule C, which is filed with Form 1040.
Partnerships report credit card interest on line 15 of Form 1065. LLCs usually file the same tax forms as partnerships, though many exceptions exist. S corporations deduct credit card interest on line 13 of Form 1120-S. Partnerships, S corps, and LLCs taxed like either receive pass-through tax treatment, meaning the interest deduction will eventually end up on the owners' individual tax returns.
C corporations report credit card interest on line 18 of Form 1120. C corporations pay tax directly, so the interest deduction does not flow through to owners.
Business owners and self-employed individuals may not know that they can deduct credit card interest for business expenses, even on a personal card. Carefully allocating interest between business and personal expenses can help you claim a significant deduction. However, separating personal and business cards will make it much simpler to deduct business credit card interest.