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R. Greg Paszkiewicz
R. Greg Paszkiewicz, Enrolled Agent
Category: Tax
Satisfied Customers: 357
Experience:  9 years preparing tax returns - Marietta, GA
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Format & Formula to calculate CC interest deductible 4 bus purchases

Customer Question

What is the acceptable format or formula to write off credit card interest from personal credit cards that were used to make both personal and business purchases?

This is for a audit of my 1999 tax return where I have 2 schedule C business.
Submitted: 11 years ago.
Category: Tax
Expert:  Jon Andrews replied 11 years ago.

1. Summarize all of the charges other than interest and categorize them as - business 1, business 2, non-business.


2. Total all of the interest paid.


3. Allocate step 2 by the ratio in step 1.


Depending on the examiner, you may need to tweak the above formula a little bit to reflect balances as of the beginning and ending of the year, but that should get you started in the right direction.


[email protected]


 

Customer: replied 11 years ago.
Reply to Jon Andrews's Post: Jon
Thanks I already knew that.

I want to know if the IRS has a format for presenting this general rule you gave to all the specifics and exceptions that occurr. You have given a formula to calculate the year in total.



Example, Interest rates that change through out the year. Using 1 credit card for 2 different schedule C business along with personal charges at the same time.

Having 11 diferent cc in use for tax year 1999.

What about Late fees and over limit fees?
Is that writeofable, and how is that proportioned to the two business and personal use?
Expert:  Jon Andrews replied 11 years ago.

If I were representing you in this audit, I would create a spreadsheet with 4 columns for each credit card - 3 as outlined above - B1, B2, NB and the fourth would be a "sub-total"column.


The first row of the spreadsheet would be the beginning of year balance for each card. The next row would be all of the non-interest and non-fee charges for January split among the three columns. The next row would be the interest and fee charges allocated for that month. I would allocate the fees in the same manner as the interest. (You might have to concede the fee portion, but I would start with it that way). The next line would be the payments made that month-allocated by the total for that column prior to payment, i.e. balances for first card columns 1, 2, and 3 are 500, 1000, 500 and payment is 400, payment would be allocated 100, 200, 100. The next line would be a subtotal as of the end of January's statement. The fourth column would have an entry on this line adding up the other three columns and showing that the total is the same as the ending balance on the statement.


I would repeat this process for each month and for each card.


Then you have a defensible document. You may not win on every item, but there is a logical application of the circumstances.


This is in accordance with Regulations Section 1.163-8T.


jon

 
Expert:  Sandi Hargrove, SkyHawks replied 11 years ago.
 Be aware that IRS specifically lists credit card interest as nondeductible if there is any personal use.  The card must be dedicated to only that business to qualify as loan interest.
Expert:  Jon Andrews replied 11 years ago.

Having been through multiple audits where this was an issue, I can tell you with certainty that a logical and reasonable application of the allocation factors as outlined above will survive an audit. Regardless of what some other "expert" has posted, the allocation formula provided follows the law as it currently stands.


[email protected] 
Expert:  R. Greg Paszkiewicz replied 11 years ago.
It would be better to have your personal & business expenses segregated on 2 cards, thereby avoiding any questioning of it. But, I would not hesitate to claim the interest that is allocable to business use, it is reasonable and defensible. If you have a good CPA defending you, you will win this argument.

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