Are Overdraft Fees Deductible for a Business?

Are Overdraft Fees Deductible for a Business?

Managing your business finances is an integral role in the success of any company. For a small business, this often includes monitoring cash flow and inventory, surveying your banking needs, filing taxes, deciding which business banking loan is the best for your business, etc. Managing all of these responsibilities helps save money, but also requires you to be knowledgeable in all these different areas. It can be challenging to know if you’ve really covered all your bases.

When it comes to filing your taxes, no business expense is too insignificant to consider. Even the smallest fees — such as overdraft fees — are important to reducing your overall tax burden…but they’re often overlooked.

What Are Overdraft Fees?

Overdraft fees are some of the most expensive bank fees that your business can pay. An overdraft is any amount of money your business spends that goes beyond what you have available in your checking account. The overdraft occurs if you withdraw too much money or pay more than you have available with a debit card, check or online transfer. When this overdraft occurs, banks typically choose to cover checks, automatic bill payments or any recurring transactions as part of their standard overdraft practices; this typically happens without your consent. The average overdraft fee is $35 per transaction. These fees can quickly add up, putting unnecessary stress on your business bank account.

Deducting Business Expenses

According to the IRS, a business expense must be both ordinary and necessary to be deductible. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

So are overdraft fees deductible for a business? The answer is yes: overdraft fees are deductible for a business, and they are often considered operating expenses. Other bank fees are deductible, too. However, these fees have to be associated with your business bank accounts — not a personal bank account.

Overdraft fees should be a rare occurrence. If your businesses fees are excessive, the IRS has the right to deem them ineligible. Overdraft fees or other bank charges that transact through a personal account are not eligible for tax deductions.

Many businesses pay more in taxes than they should because they miss deductions such as these. Deducting overdraft fees and other bank charges when filing your business taxes could be the difference between owing on your taxes and receiving a refund. Note that other tax-deductible bank fees include insufficient funds fees, monthly maintenance fees and any taxes on transactions.

How to Avoid Overdraft Fees

No one plans to experience overdraft fees, but it’s important that your small business is prepared. And even though overdraft fees are tax deductible, it’s better to find a bank that offers free business checking accounts and charges lower fees on other services and penalties. Remember that even though they’re small, these fees can quickly add up and put your business further into debt. There are many banks that have reasonable overdraft fees and policies to help you mitigate this risk.

Aside from selecting the right bank for your small business, you should always understand and monitor your business account balances. Most banks give you the opportunity to do this easily through a mobile app or online, and you’ll often be able to set alerts when your account balance reaches a certain amount. Getting to know your transaction schedule — such as invoices coming in and expenses going out — is important to avoid overdrafting. Lastly, linking your savings account or a line of credit to your business checking account will avoid an overdraft fee by pulling funds from either account (but a less expensive fee may be associated with this type of transaction).

Overdraft Protection

Overdraft protection is a controversial topic in business banking. While there are benefits to accepting the protection — such as getting temporary access to cash between paychecks or cash available in an emergency — there are also some concerns. Overdraft protection can encourage overspending and ultimately increase the number of fees you’re paying. It’s important to do your research before deciding if overdraft protection is the right solution for your business needs.

Managing Business Expenses

Good record keeping makes the tax filing process easier. For more accurate record keeping, it’s important to keep your business and personal expenses separate through the use of different accounts. Having a business bank account will allow you to keep all your business revenue in one place, and you can withdraw any business-related expenses or payments from this account.

In the event of an overdraft from your business account, it will be clear that this expense is deductible. Also, ensure documentation is sufficient for all business expenses. Always get a receipt and label transactions if necessary; include relevant information such as what it’s for and which expense category it belongs in. Lastly, consider accounting software such as FreshBooks or Zoho to help manage not just your expenses, but many of your financial and accounting needs.

Don’t miss out on savings when it comes to filing your taxes. Although you can write off overdraft and other banking fees, it’s important to recognize that these fees can get costly. Attempts to eliminate or mitigate the risk of these fees is ultimately the best decision when it comes to saving money and growing your business. However, if you’ve incurred overdraft fees this year and think you may be eligible to deduct them, be sure to have proper documentation and consult with your tax professional for more information.

Do you know of other small bank charges that are deductible for a small business? Share with us on Twitter @Revenued_com.

Chris Keller is a veteran in business finance. Prior to starting and managing his own business, he managed product lines at two Fortune 500 companies focusing on their Profit & Loss statements.
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