What expense category is Bank Service Charges?

Banks provide essential services for businesses, but these often come with associated fees. Bank service charges – for account maintenance, transactions, overdrafts, wire transfers, and more – are a common cost of doing business. For accurate financial reporting and tax compliance, accountants and SMB owners need to know how to categorize these fees properly.

This guide explains the appropriate expense category for bank service charges and covers key considerations for managing them.

Bank Service Charge Expense Category

Bank service charges incurred for maintaining and using your business bank account are considered standard operating expenses. In your accounting system, these fees are typically classified under:

• Bank Fees or Bank Service Charges: This is the most direct, clear, and recommended category.
• Office Expenses: Some businesses group minor administrative fees like bank charges here.
• General and Administrative Expenses: A broader category where these fees might be placed if a more specific account isn't used.

Using a specific category like "Bank Fees" allows for better tracking and analysis of these costs. As with all expense categorization, consistency is crucial. IRS Publication 334 confirms that bank fees related to your business are generally deductible expenses.

Some Important Considerations While Classifying Bank Service Charge Expenses

When accounting for bank fees, keep these points in mind:

1. Business Account Only: Deductible bank fees must relate specifically to your business bank account(s). Fees charged on personal bank accounts are generally not deductible as business expenses, even if some business transactions pass through the account. Maintaining separate bank accounts for business and personal finances is highly recommended for clarity and compliance.
2. Fees vs. Interest: Do not confuse bank service charges with interest expense. Service charges are fees for account maintenance, transactions (wires, ACH, checks), overdrafts, etc. Interest expense is the cost of borrowing money (loans, lines of credit) and belongs in a separate "Interest Expense" category with different tax rules.
3. Ordinary and Necessary: Fees charged by banks for standard business account services are generally considered ordinary and necessary business expenses.
4. Recordkeeping: Your monthly bank statements are the primary documentation for bank service charges. Ensure statements clearly itemize the fees charged, showing the date, amount, and type of fee. Keep these statements as part of your financial records.

Examples of Bank Service Charge Expenses

Common types of bank service charges that businesses encounter include:

• Monthly account maintenance or analysis fees
• Transaction fees (per check paid, per deposit made, per item deposited)
• Wire transfer fees (both outgoing and incoming)
• ACH (Automated Clearing House) transaction fees
• Overdraft fees / Non-Sufficient Funds (NSF) fees
• Stop payment fees
• Fees for printing business checks (if charged directly by the bank)
• Fees for falling below a minimum required balance
• Fees for statement copies or transaction research
• Fees for cash deposits or withdrawals above certain limits

(Note: Merchant service fees for processing credit card payments, even if charged by your bank, are often categorized separately under "Merchant Fees" or "Payment Processing Fees.")

Tax Implications of Bank Service Charge Expenses

• Deductibility: Bank service charges incurred on your business bank accounts are generally tax-deductible as ordinary and necessary business expenses.   

• Timing of Deduction: You deduct bank fees in the year they are paid or incurred, depending on your accounting method (Cash or Accrual). Since banks typically debit these fees directly from your account when charged, the timing is usually straightforward for both methods.   

Where to Report (Schedule C): For sole proprietors filing Schedule C (Form 1040), bank service charges are reported in Part II (Expenses). The most common lines are:

• Line 27a ("Other expenses"): List the total amount here and specify "Bank Service Charges" or "Bank Fees."
• Line 10 ("Commissions and fees"): Less common for bank charges, usually used for sales-related fees.
• Line 18 ("Office expense"): Sometimes used for administrative fees.

How Fyle Can Automate Expense Management

While bank service charges are typically identified and recorded directly from bank statements or bank feeds within your accounting software, Fyle plays a crucial supporting role in overall financial accuracy:

• Simplifies Reconciliation: Fyle ensures that other business expenses paid via corporate cards or reimbursed to employees are accurately captured, categorized, and synced to your accounting system. This leads to cleaner general ledger data, making the bank reconciliation process (where you verify bank fees alongside other transactions) significantly faster and easier.
• Captures Card-Based Fees: In the less common event that a specific bank service fee is charged directly to a company credit card linked to Fyle, the platform's real-time feeds would capture that transaction automatically, allowing for proper categorization and documentation within Fyle.
• Improves Data Integrity: By managing the complexities of employee expenses effectively, Fyle reduces the chance of errors and misclassifications elsewhere in your books, contributing to more reliable financial data overall, which helps in accurately identifying and verifying distinct items like bank fees during review.

Bank service charges are a standard deductible cost of doing business. Categorizing them clearly under "Bank Fees" or a similar specific account, keeping them separate from interest expenses, and ensuring they relate only to business accounts are key practices. 

While usually recorded directly from bank statements, accurate management of all other business expenses using tools like Fyle contributes significantly to simplified reconciliation and overall financial accuracy.