Are business bank overdraft fees deductible as a business expense!

[mikeburg]

I though I read somewhere where business bank overdraft fees created by their checks being returned insufficient was not deductible since expenses must be ordinary and necessary.

What do you think?

Does anyone know where to see either in an IRS publication or a court case.

Thanks a million for any & all help & opinions. mikeburg

[New York Enrolled Agent]

I though I read somewhere where business bank overdraft fees created by their checks being returned insufficient was not deductible since expenses must be ordinary and necessary.

What do you think?

Does anyone know where to see either in an IRS publication or a court case.

Thanks a million for any & all help & opinions. mikeburg

Might be a "it depends" answer. An occasional fee might be ordinary and necessary but here are a couple of cases where the Tax Court has not permitted a deduction. Bailey TCM 1991-385 and King TCM 2000-13

[TAX4US]

I thought if your overdraft fees were caused by a check being presented to you and bounced causing your account to overdraw was a legit expense. If this not the issue then I see no deduction.

[Snaggletooth]

Deductible

NYEA has presented extreme cases where they are not deductible, but in general they can be deducted as a business expense if they are applied against a legitimate business account.

For anyone who believes an overdraft fee should be treated as "not ordinary or necessary" should give thought to all manner of other mismanagement situations which shouldn't have happened.

What about the ill-advised hire of an incompetent employee? The build-up of obsolete inventory? The payment of big time expenses which could have been avoided? The firing of a CEO with a $100,000,000 buyout? The roll-out of a product which customers don't like and won't buy.

All of these things are much more expensive than overdraft fees. Stupid is not limited to a banking oversight, and an IRS auditor would never contest any of the items mentioned above.

[RitaB]

Yes, I think so, too

NYEA has presented extreme cases where they are not deductible, but in general they can be deducted as a business expense if they are applied against a legitimate business account.

For anyone who believes an overdraft fee should be treated as "not ordinary or necessary" should give thought to all manner of other mismanagement situations which shouldn't have happened.

Yes, I agree, I searched Publication 535 and could not find overdraft fees, per se, but on page 45, under "Penalties and Fees," it states: "Penalties for late performance or nonperformance of a contract are generally deductible." Seems like the same ball park.

I'm with New York Enrolled Agent: it depends. I understand not allowing $30,000 in overdraft fees, but some overdrafts here and there just happen, and I would deduct them. I don't know where the line is.

[David1980]

I'm with New York Enrolled Agent: it depends. I understand not allowing $30,000 in overdraft fees, but some overdrafts here and there just happen, and I would deduct them. I don't know where the line is.

Agreed, normal overdraft fees I have no problem deducting. I didn't deduct it once when it was excessive amounts on an account with loads of personal expenses. The ordinary and necessary tests work for me.

[Roland Slugg]

... here are a couple of cases where the Tax Court has not permitted a deduction. Bailey TCM 1991-385 and King TCM 2000-13

Tax Court decisions are always interesting to read, partly because of the depth, thoroughness, and clarity of the written decisions. The two cases cited by NYEA are no exception, and are even laughable when you read the facts.

In the Bailey case the procedure of making deposits to cover returning checks, and on the same day they were returned, was an interesting and unusual business model to say the least. The judge nailed the heart of the issue when he commented that if the Bailey's were able to consistently make same-day deposits to cover returning checks, then why didn't they simply deposit the funds the day before and avoid all those fees? A rhetorical question if ever there was one!

The King case was fun to read for entirely different reasons. When I finished I was left wondering why the IRS didn't hit them with fraud penalties in addition to the others. Maybe they did that later.

I don't think either of these cases should serve to convince tax preparers to NOT deduct a bank's returned check fees, but they sure contained a lot of entertainment value. Thanks to NYEA for the cites.

[TXEA]

I have no problem with deducting overdraft fees for a 100% business use account. The ordinary and necessary issue should be laid to rest when it comes to this issue. Banks are more than willing to clear checks presented for payment on the account and the overdraft fee amounts to nothing more than very high interest on covering these transactions. If a business's bank will allow the checks to clear to cover a cash flow timing issue I see no problem with the deduction. Some banks just advance a line of credit to cover these checks and others assess a charge. As long as the client zero's out the balance regularly, then what's the holdup?

The following probably meet ordinary AND necessary (but are normally not necessary), yet many will deduct without question:

1. A luxury car for business use.
2. Snacks for everyone in the office.
3. Expensive office furniture
4. A semi-working spouse on the payroll for more than he/she is worth.
5. Company retreats to the "mountains" or similar place.
6. CPE in New York when you live in Oklahoma.
7. Staying at the Hilton versus the Best Western.

Business overdraft charges are ordinary expenses - many businesses have them every year. They are not necessary, but neither are most of the items above.

Ordinary and necessary does not always require the wisest management decision or the least expensive option. So, a business that uses an overdraft fee to manage cash flow more expensively than a short term line of credit does not violate Section 162. The expenses are incurred in a business account, the checks were cleared by the bank, and a deduction should be allowed.