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Did you know that small businesses in the U.S. pay an average of $450 per year in bank fees? That is a loss of revenue that could have been used to expand your company. These costs quickly increase, whether for credit card processing, monthly maintenance, or transaction fees.
The good news is that some of these costs are tax deductible. This implies that you can recover some of your expenses, lowering your taxable income and allowing you to keep more money in your company. The key? Knowing which fees qualify, how to track them, and ensuring you claim them correctly. Let's get started.
Business expenses are the backbone of tax deductions, and bank fees often fall under this category. In most cases, the IRS permits a charge to be written off as an operating expense if paid exclusively for business purposes.
The key question is, "Was this fee necessary for my business operations?" If the answer is yes, chances are you can write it off. However, not all fees are eligible, so thorough classification is crucial.
Pro Tip: Keep personal and corporate banking distinct at all times. Tracking deductible fees can be challenging when using a personal account for business activities and may cause concerns during an audit.
After learning the fundamentals, let's examine the specific bank fees you can write off against your taxable income.
Some bank fees might reduce your taxable income, so they're not all bad news. As long as they are directly related to business operations and required for managing your company, the IRS permits businesses to deduct a wide range of banking expenses. You can reduce your tax liability and retain more funds in your company by knowing which fees are eligible.
The above pie chart shows the percentage breakdown of different tax-deductible bank fees.
Banks often charge a maintenance fee for business checking accounts, and the good news is that these fees are fully deductible. The fee can be deducted from taxes if the account is used for business purposes, regardless of whether it is a fixed monthly cost or dependent on account activity.
Pro Tip: Some banks waive monthly service fees if you maintain a minimum balance; check if your bank offers this to reduce expenses.
You can write off any fees your bank charges for deposits, withdrawals, or electronic transactions like wire transfers and ACH. These are considered essential company expenses and are deductible, whether you're paying suppliers or taking client deposits.
Example: A company like South East Client Services (SECS) processes frequent wire transfers to handle financial transactions. They guarantee that these expenses are deducted at tax time by accurately tracking and classifying them.
You most likely pay a tiny percentage of each transaction as a charge if you take payments with credit or debit cards through PayPal, Stripe, or any other merchant processor. Although these costs, typically 2-3% of each transaction, might mount up rapidly, they are completely deductible as a necessary expense of conducting the company.
Pro Tip: Keep a separate account for credit card processing to track merchant fees and streamline tax reporting easily.
When you take out a business loan, line of credit, or mortgage, any origination fees, processing charges, and interest paid can typically be deducted. Making payments on time is crucial because late fees and penalties are not deductible.
For instance, paying a $1,000 origination charge and obtaining a $50,000 business loan can be deducted from your tax return.
You can deduct if you withdraw cash for business-related expenses from an ATM and incur a withdrawal fee. However, this only applies if the withdrawal was strictly for business use.
Pro Tip: To guarantee compliance in the event of an audit, always save receipts or clear documentation of the reason for the cash withdrawal.
While many bank fees qualify for tax deductions, there are a few exceptions you should be aware of. Let's explore the fees that are not deductible.
Just because a fee appears on your bank statement doesn't mean you can claim it as a business expense. The IRS clearly defines what counts as a deductible expense and what does not. Even if they were paid for using your company account, some fees are deemed avoidable or personal, therefore they cannot be written off.
The above bar chart compares deductible vs. non-deductible bank fees.
Even if the purchase was for business purposes, maintenance or transaction costs are not deductible if you use a personal bank account for business purposes. The IRS only recognizes expenses made through a business account for tax deductions.
Pro Tip: Always use a different corporate bank account to keep personal and professional finances separate. This facilitates financial tracking in addition to tax deductions.
The IRS does not permit deductions for penalties, such as late fees on credit cards, overdraft charges, or missed loan payments. These are not accepted as valid company deductions since they are considered preventable costs.
For instance, you cannot deduct $35 from your tax return if your business credit card has a $35 late fee due to a missed payment.
The foreign transaction fee cannot be deducted if you use your business card to make an overseas purchase for personal purposes, like planning a trip. Deductions are only available for fees associated with international business transactions.
Pro Tip: To lower foreign transaction fees and streamline bookkeeping, consider having a multi-currency business account if you regularly pay overseas vendors.
Overdraft charges, bounced check fees, and insufficient funds fees fall under non-deductible expenses because they result from poor financial management. The IRS doesn't consider them as regular or essential business expenses.
After learning what is and isn't deductible, let's discuss how to record these costs to maintain compliance accurately.
Even if a bank fee is 100% tax-deductible, you must prove it to the IRS. The proper paperwork guarantees that you can take deductions during an audit without penalties. Incomplete or missing documentation may result in denied deductions or unwelcome tax authorities' attention. Staying organized and adhering to IRS regulations can help avoid compliance problems later.
Example: Businesses like South East Client Services (SECS) maintain digital records of all financial transactions. They provide an organized and IRS-compliant audit trail for tax deductions by automating record-keeping and securely storing data.
With digital banking on the rise, let's see how online businesses handle tax-deductible bank fees.
With the rise of e-commerce and remote businesses, digital banking fees have become an unavoidable expense. These expenses, which range from subscription fees for online banking tools to payment processing fees, can mount up rapidly. The good news? Online business owners can lower their taxable revenue and offset costs by deducting several items from their taxes.
Pro Tip: To prevent combining personal and company transactions, maintain a distinct corporate PayPal or Stripe account if you sell goods online. This guarantees a clear separation of deductibles and simplifies tax filing.
Let's look at practical strategies for maximizing your bank fee deductions.
You must track and classify your expenses in an organized manner to optimize your tax savings. It's not enough to know which bank fees are deductible; you must also ensure they're correctly claimed and recorded. Following best practices can help you avoid missed deductions and potential IRS scrutiny.
The above line graph compares business tax liability before and after claiming tax-deductible bank fees.
Although deductions can save you money, making mistakes when claiming bank fees can be expensive. Let's go over the common pitfalls to avoid.
Due to inadequate record-keeping, incorrect expense classification, or a lack of paperwork, many business owners lose out on important deductions. Even minor errors can have a big impact and result in lost savings or problems with IRS compliance. You can ensure you take all the eligible deductions by avoiding these typical mistakes.
Now that we've covered everything, let's summarize key takeaways.
Understanding which tax-deductible bank fees can help reduce taxable income and keep more money in your business. You can ensure you take advantage of every deduction while maintaining compliance with the IRS by keeping accurate records, using a business-only account, and regularly checking your costs.
Businesses like South East Client Services (SECS) maintain meticulous financial records, ensuring that every deductible expense, especially related to financial transactions—is properly documented. Businesses can increase financial efficiency by optimizing deductions and streamlining tax filing using structured accounting procedures.
To optimize your business finances, start by reviewing your bank fees today. Get in touch with SECS to ensure you maximize your deductions and stay IRS-compliant.
