Credit Card Late Payment Fees for S-Corp

[peggysioux]

S-Corp taxpayer has SUBSTANTIAL late payment fees on a business credit card totaling more that $24,000. Would the late payment fees be considered interest and thus tax-deductible?

[TaxGuyBill]

That Tax Court has ruled that SOME late payment or overdraft fees are "ordinary" or "necessary" for business (deductible), but there comes a point where A LOT of them would no longer be deductible.

https://community.intuit.com/questions/618093-nsf-charges-tax-deductible

[JON]

If the credit card is in the business name and the use of the credit card is 100% business- you would not be questioned with taking 100% as a deduction. The third party payor status applies to service charges too I believe.

[peggysioux]

Business Credit Card Late Payment Fees for S-Corp

There appears to be a grey area regarding the handling of late payment fees (or a difference of opinion by other tax preparers). While I would normally consider the fees tax deductible, the enormity of the fees for this business causes me to hesitate. Business usually has a profit, but for year in question, taxpayer has substantial loss (not taking into consideration the $24,000 of late fees) plus large shareholder distributions. Taxpayer stopped paying on credit card for a period of time, thus the large fees. With the additional information I provided, would other tax preparers lean towards deductible or non-deductible? Based on the IRS ruling that Bill provided, I had decided it was non-deductible, but in my research, there seems to be some who think the expense should be deductible. I was leaning toward non-deductible, but do not want to omit a deduction if actually valid at the taxpayer's expense.

[Jiggers]

If the S-Corp could not get a loan because of bad credit rating, then I might deduct the late fees.

Get a letter from the bank(s) that any loans were refused.

[kathyc2]

From what you have posted, I'm not seeing why it would not be deductible. However, if the distributions were to the extent than they were more than RE, I may feel differently. The Baily case was a SP, and at least in my opinion that makes it different.

For what it's worth, I handle such situations one of 2 ways depending on how strongly I feel about the deduction:
1) Tell client that it's a grey area and that it may not automatically stand in an audit, and then give them the option of how risky they want to be.
2) Tell client that it's a grey area and you do not feel comfortable taking the deduction, but another preparer may take it. Then they have the option of not taking deduction or going somewhere else.