S-Corp with Business Credit Card Late Fees

[peggysioux5]

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?   S-Corp had a loss for the year in question and also had substantial shareholder distributions.  The S-Corp has always made a profit in previous years.

[ILLMAS]

What the did TP say when you asked them why took out distributions instead of paying off the credit?

[rfassett]

The late fees would not be considered interest unless the lending agreement stated that the late fees are interest.  Probably not the case here and the late fees would not be deductible.

So you are saying that the substantial shareholder distributions in a loss year probably attributed to the credit card being paid late on a regular basis?  Not sure what your point is with the statement about the loss year and the shareholder distributions.  I guess if the corp had a large AAA at the beginning of the year (because of previous years being profitable and distributions not equaling the current AAA on an annual basis), there would be money to distribute.  But if the shareholders took distributions beyond the AAA, the shareholders probably have a capital gains issue at the shareholder level. 

[michaelmars]

they are interest and deductible

 

[jklcpa]

I agree that it would be deductible as interest IF the unlying debt/charges were for deductible business-related purchases or obligations.   

[BHoffman]

I agree with jklcpa.

[peggysioux5]

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. Taxpayer stopped paying on credit card for a period of time, thus the large fees  The credit card company does not show the late fees as interest when they provide the year-to-date interest paid. Another tax preparer noted Bailey TC Memo 1991-385 and after reading the ruling, I was leaning toward non-deductible, but do not want to omit a deduction at the taxpayer's expense if actually valid .

[Terry D EA]

I agree with Judy completely that these fees would "Normally" be deductible as long as the credit card was used for business related purchases with any personal purchases being deducted.. The only thing I question here the reason(s) the S-Corp shareholders took the distributions instead of paying the credit card debit. I am not sure if their reason(s) would be a determining factor of deductibility by the IRS but I certainly would want to cover that area instead of just taking a blanket approach.

[peggysioux5]

Unfortunately the shareholder take distributions from S-Corp when he needs additional personal funds and this is why I am hesitant in taking the late fee deductions.  If there were not excessive distributions then I would think whole heartily that the fees were "necessary".  But again, I don't know if I am being overly cautious and omitting a deduction that should be valid. I was hoping there was a clear cut regulation that would show if deductible or not and that other tax preparers could shed some light. I appreciate everyone's input.

 

Peggy Sioux

[Richcpaman]

Peggy:

Who do you work for?  The IRS or the Client?

The 1991 ruling was for a different place and time.  Currently, if you do NOT make your minimum payments on your credit card debt, the late fees and charges rack up REAL fast.  With 18-36% interest rates, and after charging the late fees, they charge MORE interest on the higher balance.

Your real concern should be if the credit card debt is properly in the corporations name.  I would think the IRS would bounce the debt out easier for that, then deducting the late fees. 

The purpose of non-deductibility of penalties, is to make the punishment worse when you do something WRONG.  Not the normal course of business, when there are all sorts of penalties.  Do you think that United Parcel Service isn't deducting all its parking tickets?  A friend of mine in the DC area says UPS can pay $50k to 100 grand in parking tickets.  It is a cost of doing business.  So are the large fees for non-payment. 

If you don't have a basis problem (see RFassett's post) and the purchases were not primarily personal in nature, then deducting the late fee's would not be a problem.  The IRS has ordering rules on the payment of debt, and it is presumed that the first payments out are to pay for the personal items, and not Business ones.

Rich

[peggysioux5]

Rich, thank you for your input.  The shareholder does have a basis issue and did take distributions beyond the AAA and will have to claim capital gains on distributions in excess of basis at the shareholder level, but the credit card was in the name of the corporation and 95% of expenses were business related so should be deductible, correct?