This article will explore which credit card processing fees are tax deductible, how to ensure that they are claimed properly, and how businesses can reduce these fees. We'll also look at what qualifies as a business expense in Canada and discuss some tips for finding lower rates and eliminating extra fees.
By following these guidelines and seeking the advice of a tax professional, businesses can ensure they are getting the most out of their tax benefits when it comes to credit card processing fees.
So, are payment processing fees tax deductible?
As a business owner, you know that credit card processing can come with a cost: credit card processing fees. These fees can add up quickly and become a notable expense. The good news? in both Canada and the United States, many of these fees are tax deductible.
In Canada, payment processing fees fall under the Management and Administration Fee section, while in the United States, they are considered "ordinary and necessary" business expenses.
Which business expenses are eligible for deductions in Canada?
Are you wondering what is considered a business expense?
In Canada, businesses are eligible for tax deductions on expenses incurred to earn business income.
The rules can be blurry. Especially when you look at which office items are considered “expenses” such as pens, pencils, stamps, and paper clips, VS. “capital items (not deductible)’ such as chairs, calculators, desks, and filing cabinets.
Here is a compiled list of deductible expense for businesses in Canada published by the CRA. Note that payment processing fees are a deductible business expense under the Management And Administration Fee section.
The CRA also provides this handy bit of advice if you find yourself wondering whether an expense is deductible as a business expense:
As a rule, you can deduct any reasonable current expense you incur to earn income. The deductible expenses include any GST/HST you incur on these expenses minus the amount of any input tax credit claimed.
“As a rule, you can deduct any reasonable current expense you incur to earn income."
-Canadian Revenue Agency
P.S. The jury is still out on why we wouldn’t need desks and chairs to earn income under this definition, but we know that payment processing fees are deductible.
However, to be eligible for a tax deduction, an expense must meet the following criteria:
- It must be incurred to earn business income
- It must be reasonable in amount
- It must be supported by documentation
It's also important to note that some fees may not be deductible if they are considered capital expenses (filing cabinets and chairs) or incurred for personal use (your kid's birthday present.)
Regardless, keeping detailed records of your credit card processing fees and purchases you plan to expense is good practice.
The Business Development Bank of Canada cites advice from the CRA Liaison service emphasizing the importance of retaining and submitting original invoices and receipts.
Practicing administrative hygiene is key to running your business smoothly and streamlining tax season. If you are still keeping a plastic folder of all your invoices and receipts, this year might be the time to switch to a customer relationship management tool that automatically synchronizes your payments, receipts, invoices, inventory, and customer information all in one place. Retire the spreadsheets and keep synchronized records along with useful sales and customer data insights.
Of course, keeping organized records helps, but if you are unsure or need help when tax season comes, consult a tax professional to ensure you correctly claim your deductions.
Tax Deductibility of Credit Card Processing Fees in the US
In the US, businesses are also eligible for tax deductions on credit card processing fees. The IRS allows deductions for expenses considered “ordinary and necessary” in conducting your business.
An expense is considered ordinary if it is common and accepted in your industry.
An expense is deemed necessary if it is helpful and appropriate for your business.
Credit card processing fees meet both of these criteria. They are considered ordinary because most businesses accept credit cards as payment and they are necessary because credit card payments have become a familiar and expected payment method for customers.
Which Credit Card Processing fees are tax deductible?
Examples of credit card processing fees that are tax deductible include:
- Monthly statement fees
- Transaction fees
- Interchange fees
- Merchant account fees
- Setup fees
- Chargeback fees
Most fees and costs charged by your payment processor will be tax deductible. However, other ways exist to reduce or eliminate extra and hidden fees. Read your statement and note where your costs add up, especially in that additional or ‘other’ fees section.
How to Ensure Credit Card Processing Fees are Tax Deductible
Keeping accurate records and documentation of all fees paid is essential to ensure your credit card processing fees are tax deductible.
- Monthly statements from your credit card processor
- Invoices and receipts for fees paid
- Bank statements showing fees paid
In addition to proper documentation, it’s advised to consult with a tax professional to ensure that you are correctly claiming your deductions and taking advantage of all available tax benefits.
How to reduce your credit card processing fees
Although processing fees are accepted as a cost of doing business, it doesn’t mean you need to buy the price your payment processor may be charging you without a second look. So how can you find lower rates, and how do you know what you’re paying?
Start by learning about the credit card transaction process and what credit card processing fees are going towards. Typically, fees are made up of three components: the interchange fee, the cost of the transaction, and your payment processor’s margin.
Understand your pricing model and ask about special rates
Depending on the pricing model your provider offers, you may be getting the wholesale rates with a small margin in the case of Interchange Plus pricing or paying one flat rate regardless of the actual costs in the case of flat rate pricing.
If you have an Interchange Plus provider, ask about volume-based discounts or interchange rates for your specific industry. For example, registered charities and non-profit organizations often qualify for lower rates .
Cut extra and hidden fees
Next, take a look at your monthly processing statement. Tally up all your extra, “additional,” or “other” charges, as well as sneaky charges like “administrative fees, PCI compliance fees, batch settlement fees, and more.
Once you completely understand how much you are paying, consider leaving your merchant contract for a better payment provider. Ensure you don’t get saddled with an early termination fee for canceling your service or equipment contract.
Tax Season Ready
Credit card processing fees can be a significant expense for businesses. However, now you can look forward to tax season knowing that many of these fees are tax deductible in both Canada and the US. By keeping accurate records and consulting with a tax professional, you can ensure that you are properly claiming your deductions and maximizing your tax benefits. We hope this guide will help you prepare for tax season, and provide you with some helpful information on reducing your overall credit card processing costs.