Are Merchant Service Fees Tax Deductible?

There are various tax rules regarding merchant service fees that merchants can take advantage of. These rules allow merchants to deduct charges that they incur when processing credit card payments. For instance, a merchant can deduct fees for both credit and debit cards when they’ve paid their income taxes electronically.

Merchants can also make deductions for situations where the credit card company charges fees for completing charged sales. Merchants that use business credit cards may also be eligible for deductions, depending on the annual rates and late fees which they must pay.

Tax Deductions to Take Advantage of

The IRS gives tax payers the ability to make payments electronically. However, the IRS is not allowed to directly pay for fees which are related to credit card transactions. The IRS introduced a deduction in 2009 that offsets the charge which is made by credit card companies whenever merchants make tax payments electronically. This deduction is part of the miscellaneous itemized deductions, and they cannot be higher than two percent of the merchant’s gross adjusted revenue.

When a merchant accepts credit card payments, the processor will charge a fee for each card swipe. The IRS allows these fees to be deducted for business taxes. Merchants that use their business credit cards for business related payments may qualify for a number of deductions. Any interest paid on the card is completely deductible, and when a merchant is charged an annual fee or late charge these will also be deductible. However, these only apply to business credit cards, not personal ones.

Reporting Credit Card Transactions

It is important for merchants to review their bookkeeping and accounting. Once they begin reporting their card transaction to the IRS, it is important to make sure there are no discrepancies. The IRS has specific guidelines which are related to reporting credit card transactions, with the main regulation being REG-139255-08. There are rules for who must perform the reporting, as well as the manner in which the gross amounts will be calculated. Merchants must withhold funds so that they can be backup reported, and the IRS has also released a guide on how to fill out the 1099-K form.

Both merchants and their accountants will need to become familiar with the new format. Banks are also required to report the gross receipts. Because businesses frequently have chargebacks, refunds, or payments where the customer will receive some cash back, banks will only have to report the gross payments annually and for each month. Chargebacks, refunds and related items won’t be factored against the gross amounts.

It is important for merchants to have efficient accounting procedures so that they can manage all these items. Because many merchants, especially those that operate small businesses, are used to only recording the net deposits from their merchant account, these net deposits should be split into receipts along with the related fees. That way, the financial reports you submit will be in compliance with the 1099-K. Understanding the various deductions available and how to take advantage of them can save you a tremendous amount of money.