Business Credit Cards and Tax Deductions
Abid Salahi
•8 min read
Business credit cards offer the ease of managing business expenses efficiently and effectively. In Canada, credit card issuers and banks motivate users to apply for a business credit card through lucrative offers and benefits. While filing for taxation, you don’t always need to report your transactional data to an accountant or a lawyer. Instead, you might be interested to know what sort of tax deductions are available to business credit cards.
Now let's explore all information on the prerequisites to apply for tax deduction and the types of expenses that are tax deductible. We are offering a complete guide on business credit cards and associated tax deductions.
What is a tax deduction?
If you are not aware of the concept of tax deduction then let me put it in words for you. Tax deduction refers to the reduction in the amount you owe as tax money to the state or government. Certain types of expenses are excluded from the gross income. These expenses can lower the gross income by excluding the tax-deductible expenses. This way you will have to pay lower taxes as the tax applies on gross income after deducting all such business expenses.
Business credit card and tax deduction
In Canada, the expenses that are done for business purpose are allowed to be deducted from the gross income to lower the taxable income. For business credit cards, there are two ways that you can lower the gross income. You can report the expenses that are incurred on business activities as you might have expected. But in addition to that, you will be surprised to know that the accrued interest on expenses done on business activities can also be deducted.
Criteria for deducting business expenses
To ascertain the transactions are done to conduct business activities, there are some criteria that you have to meet. This criterion will help you understand the prerequisites to ascertain that the expenses you have incurred are directly related to business activities and have helped you in fulfilling the needs of your business. The basic criteria is shared below, though some credit card companies may require some additional inquiry too. Here is the general criterion that you need to fulfill to enjoy the perks of tax deduction from your gross income:
- Own a business: It is necessary that you are the owner of the business. Be it a sole proprietor, partnership, or corporation, you should be entitled as the owner of the business. Only then you will be allowed to deduct the business expense. No matter if your business is small or large scale, it should be registered and you should be the designated owner.
- Segregate the personal and business expenses: You must segregate the business expenses from your personal expenses. Remember the tax deduction is applied only on the business expenses. If you hold the same credit card and use it to conduct personal as well as business transactions from it then it can lead to trouble for you. For starters, you will have to specify which expense was related to business activity and which expense was done for personal needs. Such separation can take a lot of time and effort. It can also lead to confusion. You won't be able to deduct the full annual fee of the credit card as a proportion of it is only used for business activities (while the rest is used for personal expenses). This is why only a specified proportion of the annual fee will be deducted. This is why it is better to have a dedicated business credit card that is applied only for business activities. Having a separate business credit card not only makes it easy to show the business expenses but also helps you to compile the total expenditure. With an exclusive business credit card, it will become easier for you to report and justify the expenses.
- Relevance of expenses: All the expenses that are incurred in the business credit card should be necessary to conduct business operations. You might be asked to prove the relevancy of expenses as the bank or credit card issuer would want to allow the deduction of only those expenses that are concerned with the generation of the business. This is why all the expenses you record must be in direct relevance to your business activities and operations. In simple words, all incurred expenses should be used in generating business income.
- Record keeping: Maintaining the record is a prerequisite to applying for a tax deduction. This becomes even more necessary and complicated when you use one account to conduct both personal and business transactions. Ideally, you should maintain a record of every incurred expense along with proofs such as invoices, receipts, and other such documents. Such a record will help you to prove the need for expense in case you face a tax audit.
- Reasonable expenses: The expense that you have incurred should be within a reasonable limit. If you spend money extravagantly without any actual need then it won't be deducted from the gross income. For example, if you already have enough office supplies but you order more just because there is a promotion going on or you really like the new lot then it won't be considered a reasonable expense. Such unreasonable and excessive expenses will not be entertained rather they won't be deducted from taxable income. In such cases when you have a mix of reasonable and unreasonable expenses then only the necessary claims are met and the full amount (or expense) is not deducted.
Business credit card and deductible expenses
To give you a clear idea of what expenses are deemed tax-deductible, here is a list of mostly incurred business expenses that you can deduct from the gross income. The nature of these expenses will help you understand what we mean by business expenses.
- Office supplies: Office supplies are necessary to conduct day-to-day business activities. These supplies are what help you to complete the daily business requirements. They include printer ink, stationery, and other such supplies.
- The home-office work structure: If you have turned a room in your house into your office or workplace then you can deduct the expense you incur on that room. You can apply to deduct a specified amount of expenses related to your home such as utilities, rent, internet, etc. as you can claim that these expenses are directly related to conducting business operations. For example, without the internet, you cannot operate the online portal, or without electricity (utilities) you can't use the computer system or recharge the laptop.
- Subscriptions: If you have taken any subscriptions to conduct business operations then the monthly expense on such subscriptions is also tax deductible.
- Travel expense: If the nature of your business is such that you are required to frequently travel then the travel-related expenses will be deducted. This includes transportation expenses, meals, accommodation, and any other such expenses. However, you can only spend a specified amount on meals (and even entertainment) as you are not on vacation but on a business trip where you are expected to spend moderately.
- Donation to charities: If you invest in community work for charity then it can also be deducted from the taxable income. It is better to give donations to registered charities or else have solid proof to share that the charity is legit.
- Professional charges: You might need some professional advice to conduct business activities or to broaden the business activities. If you incur any such professional charges then they are also deducted from the taxable income. These charges include the lawyer's fee, accountant charges, and fees paid to other such professionals for their specialized advice or service.
- Insurance expense: The premium and monthly installment of insurance plans purchased for business operations are also tax deductible. It includes insurance plans such as liability insurance.
- Promotion purpose: The money that you have spent on promotion activities can be deducted from the gross income. This includes the advertising budget, the money spent on social media promotion, mass media promotion, billboards, flyers, and other such promotional expenses. Promotion is necessary to get more business so it is considered to be directly related to generating business income.
Tax deductible credit card fee
The fees paid for a business credit card are also tax deductible and can be subtracted from the taxable income before calculating tax. The business credit card related fees that can be considered tax-deductible include:
- Annual business credit card fee
- Late payment fee
- Balance transfer (from one credit card to another)
- Fees for conducting international transactions
- Fee to get cash advances
- Overdraft fee