Are Credit Card Processing Fees Tax Deductible?
Due to the disruption caused by the COVID-19 pandemic, federal tax filing deadlines have been extended to July 15, 2020, giving millions of businesses much-needed relief. But as the deadline draws nearer, you may be wondering how you can maximize your deductions and minimize your taxable income. After the financial instability caused by the coronavirus, many businesses are looking for ways to save money wherever possible. One area you may have overlooked is your credit card processing fees.
Credit card processing fees are the fees your business pays to a merchant services provider in order to accept credit card payments from your customers. Fortunately, the IRS has determined these fees are tax deductible.
Which expenses are deductible?
For many businesses, the idea of filing taxes can be overwhelming. There are thousands of laws and regulations to navigate and serious consequences if you under- or overestimate your taxable income. How can you know which expenses are tax deductible, and which are not?
The most basic rule of thumb comes from the IRS itself. You (and your accountant) will be on the lookout for what the IRS calls “necessary” and “ordinary” expenses. According to the IRS, an ordinary expense “is 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.” In order to qualify as tax deductible, an expense must be both ordinary and necessary.
The good news is that credit card processing fees, also known as merchant service fees, are considered ordinary and necessary for businesses of all sizes. Deducting these fees from your taxable income can provide your business with necessary capital in this uncertain time.
Merchant services fees may include:
- Flat rate fees
- Markup fees
- Per-transaction fees
- Authorization fees
- PCI compliance fees
- Statement fees
Depending on your merchant services provider, you may incur all of these fees or only a few. However, the best merchant services providers offer transparent pricing structures, don’t charge unnecessary fees, and can even help you read your monthly credit card processing statement to ensure you’re getting a fair price. If you can reduce the amount you pay in credit card processing fees up front, then you’ll have less work to do when the filing deadline rolls around.
How to deduct credit card processing fees
In order to correctly deduct credit card processing fees when filing taxes, it’s imperative your business keeps detailed records of the fees incurred. At the beginning of the year, your credit card processor will send you form 1099-K (Payment Card and Third Party Network Transactions). This form is sent to both you and the IRS, and it lists your business’ gross income on credit and debit transactions for the past year. However, it does not list the fees you pay on credit card processing, so it’s vital to keep your own records on these expenses in order to give your accountant the most accurate information.
Finally, it’s important to consider recent changes to tax law. In 2017, President Trump signed the Tax Cuts and Job Act (TCJA) into law, the largest tax reform in over 30 years. The TCJA introduced many changes to the tax rules starting in 2018, so if you’re looking to get the most out of your tax filing, make sure to find an accountant who is familiar with the latest changes and can assist your business in maximizing your deductions according to the newest tax laws. Especially in light of the pandemic, you’ll need an accountant who can deftly navigate the ever-changing tax landscape and ensure your business receives the highest amount of deductions.