We all have to deal with banks on a regular basis – apart from those of us who live on a desert island where the only currency is clam shells – and we all know that banks do not work for free. Charges for things like check writing, overdrafts, late payments, monthly maintenance, foreign transactions, and using an ATM can really add up over the course of a year. Because all of these fees are related to our everyday lives and earning a living, they should be deductible, right?
As appealing as this argument may be, for most taxpayers, the answer to the question is no. However, the answer becomes a resounding yes for those taxpayers who operate their own business. For these folks, bank fees can indeed be deductible. As always, there are rules and conditions that apply, so please allow me to explain.
First of all, the amounts you can claim must be business-related and you can only deduct those expenses that are “ordinary and necessary” for the operation of the business. An “ordinary” expense is an expense that is common and accepted in your line of work, such as the costs of operating the truck an electrician uses for work. A “necessary” expense is an expense that is helpful and appropriate for the taxpayer’s trade or business, such as the tools and supplies that the electrician uses every day on the job.
Our electrician also needs to have a bank account to use in managing his business so that he can buy the supplies and materials he needs to do his work and deposit the payments he receives from his customers. He will probably also have a business credit card and perhaps even a line of credit at his bank. This financial setup is typical for electricians and other self-employed contractors as well as needed to help them keep track of the financial side of their operations. All bank expenses related to our electrician’s business operations are thus ordinary and necessary and are, therefore, deductible.
Secondly, the expenses claimed must not be excessive or unreasonable in the eyes of the IRS. For example, if the electrician reported $50,000 in overdraft fees during the year, the IRS would likely ask for further information before approving such an unusually large amount.
The best practice for our electrician and other business operators who seek to deduct their business-related bank fees is to have separate personal and business bank accounts and credit cards. They should also make sure to use each type of account only for its assigned purpose. We have seen some cases of contractors who have ignored this recommendation and have thus intermingled their personal and business expenses in a personal bank account. This creates an accounting nightmare at the end of the year when trying to decide what percentage of the monthly maintenance fees and overdraft charges for their personal account can be deducted as a business expense. Such problems are avoided with separate business accounts that are used only for legitimate business purposes, because 100% of the fees related to these accounts are deductible.
Good recordkeeping is also essential to taking advantage of the deduction for business bank fees. Once again, having separate accounts makes this task easier as you will not have to scroll through pages of personal bank statements to identify which line items may be deductible for the business. You may be surprised at the end of the year when you put together all the maintenance, check, ATM, foreign exchange, overdraft, returned check, late payment, and other fees related to your business accounts – sometimes, it can add up to a lot of clams!