4 questions about deductibility of credit card fees for small business owners

[hameshatumkochaha]

Hi,

I have 4 questions.  Please keep numbering in your answers.  Much appreciated!  

1. We have a small business.  I earn with W2 and my spouse earns with form-1099 for her small business PLLC sole proprietorship.  It appears per IRS that an annual fee for a business credit card such as Chase Ink is deductible.  Please confirm whether my interpretation is accurate. 

2. I pay extra Fed + State Taxes from my W2 to cover the business earnings but we still fall short every year; so we pay 1040-ES each year.  Say $10k/yr.  I noticed that for 1.87% fee, IRS accepts Credit Cards to pay the fee.  While it is not a small percentage, if we pay with a credit card, for say $10k we pay in 1040-ES, we will incur $187 annually just in fees.  I want to know will that be a deductible business expense for the coming year?  Which bucket under Schedule C will it fall under?  

3. After preparing 2019 taxes with TT, I find that we owe IRS ~$500.  If I pay that with a credit card, it is a payment against 1040 (not against 1040-ES); will that be also tax-deductible against the business expenses the next year?  

4. Is there a less expensive option to pay IRS with a credit card than 1.87%?  

Thanks!

[Opus 17]

1. Any expense that is a customary and necessary expense of doing business is deductible against business income. (Necessary does not mean essential.) Fees to maintain bank and credit card accounts necessary for doing business are certainly in that category.

2. This is problematic.  Because your personal tax return includes both your wages and your spouse‘s business income on schedule C, it will be difficult to determine what part of those fees are business expenses and what part are personal expenses.  If audited, you would have to give the auditor some kind of reasonable explanation and hope they accept it.

3. If you are asking about the income tax payment itself, federal income tax payments are not deductible expenses against business income on your federal return.  Federal tax payments may be deductible on your state tax return; if so, they are a deduction taken in the year that you actually make the payment, regardless of what tax year the payment is for.

if you are asking about the credit card fees, the answer is the same as number 2.

[Opus 17]

4. You can make a direct debit from your bank account without incurring service fees.  You can use Direct Pay or EFTPS.

https://www.irs.gov/payments/direct-pay

https://www.irs.gov/payments/eftps-the-electronic-federal-tax-payment-system

[hameshatumkochaha]

Thanks for the answers!  Much appreciated! 

3. Yes, I should have been clearer.  I was asking about the 1.87% fee on the $500 payment I owe the Fed.  

Going back to #2: 

2. I wonder how do I convince?  To me, this is the real situation: when I was on W2 with wife not earning using a 1099, my deductions from W2 using W4 assignments covered the payment we owed to the IRS.  Now, for the last few years as she started the business, her 1099 income increased and it doesn't allow her (in a reasonably easy way) to withhold a % similar to with my W2.  She is a healthcare worker and main source of income is insurance payments from multiple insurance companies.  Say, the last year her income was ~$50k and after deductions, we paid about $20k which is about 40% a small business pays in taxes.  My 1040-ES total per TT for the coming year comes to ~$17k.  (In other words, even after adjusting my W4, I am only covering $3k out of $20k her business owes IRS...  So the $17k should be bucketed under the business expense...)  Would that be a good explanation?   Ideally, I want IRS documents to state that the fees incurred during the CC payment for IRS 1040-ES are indeed bank fees associated that I can expense...  Is there something like that? 

In other words, there are two possible objections I see from the IRS: 

a. The fee is not business-related

b. The payment we made with 1040-ES were not associated with the business.  

Would the explanation above be reasonable enough?  

2b. I also wonder whether for a business of $50k income and say ~$10k expenses would the $200 expenses on "bank fees" for CC payment to IRS 1040-ES be indeed be a flag...  

Thanks again!  

[Carl]

On thing in your post that jumped out at me, and I just want to make sure you are aware of a few things. You probably are. But here goes.

1. We have a small business. I earn with W2 and my spouse earns with form-1099 for her small business PLLC sole proprietorship.

So the fact is, there are two businesses here. It's quite clear that your wife owns a single member LLC which she reports on SCH C as the one and only owner of that business.

What's not clear is the other business. You say "we" own a business. If that business is a single member LLC or sole proprietorship then "we" can't own it. There can only be one owner. Additionally, that one owner does not issue themselves any kind of tax reporting document such as a W-2 or 1099-MISC either. There are no exceptions for a sole proprietorship or single member LLC.

If it's a partnership, then the business still still "NOT" issue any kind of tax reporting document to any partner either.

However, if it's a corporation (S or C Corp) then no problem and you're fine.

[hameshatumkochaha]

I apologize for the confusion.  I should not have said "we".  I am an employee for an S&P500 company.  My wife indeed owns her business as a sole proprietorship PLLC and I am not employed by her nor am affiliated with her company.  My saying "we have a small business" was simply a wrong statement.  I hope that clarifies things.  

Based on the clarification, please let me know your opinion on the question for #2 in my previous post.  

Again, my apologies.  

Thanks,

[Opus 17]

Since I am not a CPA and can’t represent you in an audit, I don’t feel I can go any farther than my previous answer to #2.  Because filing a form 1040 with a schedule C is by design a combination of business and personal information, any charges to prepare such a tax return are also a combination of business and personal expense (such as hiring a CPA to do your taxes or incurring credit card fees to pay the taxes).  

The amount at risk is probably fairly small. If you were audited, and were found to have improperly allocated personal expenses to the business side, the penalty for underpayment of your taxes with interest is about 1% per month of the amount of the under payment. The IRS can only audit you for 36 months. so the most you could be penalized for improperly allocating a $200 service charge would be about $72 in the worst case scenario. However, it is up to you to decide if you want to allocate the expense to the business and to have a logical argument if you are audited.

[hameshatumkochaha]

THANKS!