Schedule C - credit card interest

[oceanlovin'ea]

Just one more question. I think I know the answer but want to clarify.

A Schedule C person who has credit card interest on card he uses for business only - the interest is deductible, correct? What about that late charges? They are included as interest in the eyes of
the credit card company. Also mortgage late charges are included with mortgage interest. So would this be the same?

Thanks

Linda F

[JohnH]

I always deduct interest if the credit card is used exclusively for business. (Sometimes a small adjustment is needed for inconsequential personal expenses charged to the card). And yes, the late fees are deductible. Some people erroneously think these are non-deductible fines or penalties - they are mistaken.

[Rapid Robert]

Also mortgage late charges are included with mortgage interest. So would this be the same?

I disagree with the above statement. If your mortgage loan company charges you a late payment fee, that is not deductible as mortgage interest on your personal residence. (And it won't be included on Form 1098).

I agree with previous comment, all expenses of a business-use credit card are deductible to the business.

[taxea]

I disagree with the above statement. If your mortgage loan company charges you a late payment fee, that is not deductible as mortgage interest on your personal residence. (And it won't be included on Form 1098).

I agree with previous comment, all expenses of a business-use credit card are deductible to the business.

There is a difference between personal and business deductions. The interest/late fees are deductible on Sch C.

[BP.]

mortgage late charges are included with mortgage interest.

I disagree with the above statement. If your mortgage loan company charges you a late payment fee, that is not deductible as mortgage interest on your personal residence. (And it won't be included on Form 1098).

I was looking at Pub 936 Home Mortgage Interest- p. 4 - and it is saying you can deduct late payment charges as home mortgage interest. They've shown up on 1098s.

[TaxGuyBill]

I was looking at Pub 936 Home Mortgage Interest- p. 4 - and it is saying you can deduct late payment charges as home mortgage interest. They've shown up on 1098s.

Interesting, I did not know that. Thanks.

[Rapid Robert]

Interesting, I did not know that. Thanks.

I didn't either. However I'm still not sure, because what the pub really says is, "You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan."

Not sure exactly what that means, and don't have time to look any further right now. You might say, well of course the late payment charge wasn't for "a specific service performed", but then what is an example of a late charge that is for a specific service?

[taxea]

Found it in Pub 530
Amounts charged for services. Amounts charged by the lender for specific services con-nected to the loan aren't interest. Examples of these charges are:
Appraisal fees,
Notary fees, and
Preparation costs for the mortgage note or deed of trust.

[Rapid Robert]

I seriously doubt if any of the above would be relevant to "interest" associated with late payment of a mortgage debt.
(These sound a lot more like loan acquisition costs instead.)

I agree; none of these "specific services provided" would typically ever be subject to a late payment charge, because they are usually one-time expenses and often paid out of escrow.

I stand corrected on my original comment; apparently ordinary monthly mortgage payment late fees are deductible as interest. Too bad; no reason in my opinion why they should be, but probably some legislator on the leash of his lobbyist influenced whatever Treasury regs apply here.

[JohnH]

Why wouldn't they be deductible? Mortgage late charges are nothing more than additional interest under a different name.

[Rapid Robert]

Why wouldn't they be deductible? Mortgage late charges are nothing more than additional interest under a different name.

"additional interest"? Not really. If my mortgage is at a 5% APR, and the late fee calculates to a 15-20% annual equivalent rate or higher, then that's not really "additional interest" -- it's a fee, plain and simple. Or to put it another way, if the late fee is a fixed amount, not based on the size of the late payment, then clearly it is not simply a finance charge (interest). Also, unlike IRS late payment interest which is calculated day by day to the exact date payment is received, I imagine most late payment fees are a flat amount, whether you are 3 days or 30 days late. So again, not interest under any reasonable definition.

As I implied above, the most likely explanation is that it benefits the banks to report the late payment fee income as "interest received" rather than ordinary income. Only the most naive would think it has anything to do with helping the taxpayer.

[JON]

1098 Mortgage interest

always has included late fee charges for the ones I have looked at.

[JohnH]

"additional interest"? Not really. If my mortgage is at a 5% APR, and the late fee calculates to a 15-20% annual equivalent rate or higher, then that's not really "additional interest" -- it's a fee, plain and simple. Or to put it another way, if the late fee is a fixed amount, not based on the size of the late payment, then clearly it is not simply a finance charge (interest). Also, unlike IRS late payment interest which is calculated day by day to the exact date payment is received, I imagine most late payment fees are a flat amount, whether you are 3 days or 30 days late. So again, not interest under any reasonable definition.

As I implied above, the most likely explanation is that it benefits the banks to report the late payment fee income as "interest received" rather than ordinary income. Only the most naive would think it has anything to do with helping the taxpayer.

The "interest" vs "late fee" discussion is a distinction without a difference. They carry a different name, but late payment fees and interest are essentially the same thing - nothing more than a charge for the use of someone else's money. The financial services industry has invented these buckets for classification purposes, and also to hide the fact the "late fees" amount to a form of usury. As accountants and tax preparers, we must take notice of the bucket concept of course, but if we take the time to step into financial mode, it's possible to lay aside these artificial constructs and think analytically.