NSF fees

[DaveinTexas]

Are NSF, Non Sufficient Funds, fees that a bank charges deductible if the fees are the result of poor money management by a business?

The business is a sole proprietor with cash flow problems.

TIA.

[taxmandan]

NSF expesnes

I don't consider them deductible, they are not ordinary and necessary to the operation of any business.

[DaveinTexas]

That's what I figured

You could argue that they are ordinary as everyone makes mistakes, but definitely not necessary. I think they are not deductible because they are a penalty/fine and usually penalties/fines are not deductible.

Thanks for the confirmation.

[JohnH]

I deduct them

They are as ordinary and necessary as many other business expenses. Not a wise use of money, but definitely deductible IMO. NSF fees are a service charge arising from a contractural obligation between two businesses. They are similar in nature to penalties for failure to complete a contract incurred by a construction contractor, which are clearly deductible.

They definitely would not fall into the nondeductible "Penalties & Fines" category as I understand it, as Sec 162 bars fines & penalties paid to government entities for violations of the law. Overdrawing your checking account is expensive & dumb, but it doesn't frustrate public policy (unless someone takes you to court).

[taxmandan]

Not sure how they could be considered necessary, prudent business practices would easily avoid such fees. Now, if the business owner were to attend Bookkeeping 101 class to learn how to balance a check book and keep a tally of funds on hand, I would deduct tuition as a necessary expense. Avoiding such fees would go a long way towards fixing his cash flow problems too.

[JohnH]

Who are we working for, the client or IRS?

I have two pencils on my desk. Since I can only write with one at a time, the second one is not necessary. Prudent business practice would easliy allow me to avoid the cost of a second pencil, but I'm still deducting both of them.

Your client is making bad business decisions, he probably needs some educating, and he might even need someone moralizing about his poor cash management. But he doesn't need the person he trusts to take care of his taxes trying to figure out ways to penalize him with an extra tax liability just because they don't like the way he operates.

If I had the attitude toward a client that you express here, I think the ethical thing for me to do would be to send them to someone who will look out for their interests rather than look for ways to punish them.

[Gene V]

Are NSF, Non Sufficient Funds, fees that a bank charges deductible if the fees are the result of poor money management by a business?

The business is a sole proprietor with cash flow problems.

TIA.

I agree with JohnH, they are deductible as business expense.

[DaveO]

I deduct them

NSF fees may occur for reasons outside your clients control. Checks written to him may have bounced. If he doesn't pay the fees they will close his account. While not exactly the same mortgage late fees are deductible as mortgge interest since the fees are a charge for the use of the banks money. I see NSF fees in the same light.

[KJ Judd]

I agree - NSF is a deductible business expense. No one said you need to be a great business person. These are still related to running a business and are definitely ordinary. I think the case of necessary can be made as well.

I would however talk to the client and point out the cost of these NSF fees and encourage them to get a better handle on their cash flow.

[Corduroy Frog]

Drop in the Bucket

"Ordinary and necessary" includes many things that are never questioned. What about inefficiencies such as having to eat the cost of a wrong part ordered (certainly not necessary), or failure to supervise inefficient employees or the $100,000,000 + cost(certainly not ordinary) of having to buy out the employment contract of the Home Depot CEO? And we even dare to think of NSFs being non-deductible?

Stupid does not equate to non-deductible, although that sounds appealing to some folks. NSFs have happened to nearly all businesses at some point, unless they are on a first-name basis with their banker -- and that doesn't always help nowadays.

[thomtax]

Ordinary and necessary

I seriously doubt that anyone has a clienc/company that has perfect employees that have never posted a figure wrongly. For example a $3000.00 check gets posted as $300.00. Before the error is found, the $2700.00 shortage in the checking account causes some checks to bounce - thus NSF fees. - Ordinary

Without a checking account, few businesses can stay in business. - Necessary

I consider them deductible.

[Jiggers]

NSF Fees

I consider them deductible.

Some small companies operate this way instead of getting a bank operating loan.

And since the banks permit it, I consider it a normal operating expense and it is deductible.

However, at a seminar a court case was mentioned that said that these were not deductible. I do not remember the court case.

[Joe Btfsplk]

Nsf

I don't agree with the concept that an NSF fee is not deductible since prudent business practice would prevent such fees. That argument would be like saying an NOL is not deductible since prudent business practices always result in profits.

An NSF could occur if you overlooked a bank debit that occurs once or twice a year.

I think it could be considered an ordinary and necessary cost of using a bank to pay your bills instead of using money orders or paying cash for everything.

[sea-tax]

I have always deducted them as a business expense, In fact I never have even questioned not deducting them.

[JohnH]

Could be your perspective

Maybe you never questioned it because it never occurred to you that it was part of your job to punish clients who make dumb business decisions by making them pay more in taxes, as has been suggested earlier in this string.