What expense category is Banking Fees?

Note on IRS Publications: Guidance on deducting banking fees comes from IRS Publication 334 (Tax Guide for Small Business, 2024), which lists "Bank fees" under deductible "Other Expenses." Publication 529 (Miscellaneous Deductions, Rev. Dec 2020) clarifies that fees on personal accounts are generally not deductible.

Banking fees are charges imposed by financial institutions for various account services, transactions, and maintenance related to business bank accounts. Properly accounting for these fees is part of accurate financial management.

How the IRS Views Banking Fee Expenses

The IRS allows businesses to deduct ordinary and necessary bank fees charged on business accounts as a business expense. These are costs incurred in the normal operation of the business's financial activities. Fees charged on personal bank accounts, even if some business transactions flow through them, are generally not deductible.

Relevant IRS Publications:

• Publication 334 (Tax Guide for Small Business, 2024): Lists "Bank fees" as deductible under "Other Expenses You Can Deduct".
• Publication 529 (Miscellaneous Deductions, Rev. Dec 2020): Notes fees for writing checks on a personal account are not deductible.

What Expense Category Should Banking Fees Fall Under?

For Internal Accounting: You might use categories like:

1. Bank Service Charges
2. Bank Fees
3. Operating Expenses - Financial
4. Transaction Fees

For Tax Purposes (IRS Classification): Qualifying banking fees are deductible under Other Business Expenses (which includes the "Bank fees" line item referenced in Pub 334).

Banking Fee Expense Use Cases and Tax Categorization (IRS Treatment)

1. Monthly maintenance/service fees on a business checking account: Deductible Other Business Expense.
2. ATM withdrawal fees using a business debit card for business cash: Deductible Other Business Expense.
3. Wire transfer fees for sending business payments: Deductible Other Business Expense.
4. Overdraft fees charged on a business account: Generally deductible as Other Business Expense if occasional and incurred in the normal course of business. (Frequent overdraft fees might be scrutinized).
5. Returned deposit fees (from deposited checks bouncing): Generally deductible as Other Business Expense.
6. Fees charged on a personal bank account: Not Deductible.
7. Loan origination fees or points: Treated as interest or capitalized loan costs, Not deducted as bank fees.

Categories to Avoid While Categorizing Banking Fees for Tax Purposes

1. Deducting Fees from Personal Accounts: Bank fees charged on personal checking or savings accounts are not deductible business expenses, even if the account is sometimes used for business.
2. Treating Loan Costs as Bank Fees: Fees specifically for obtaining a loan (origination fees, points) follow different rules (interest deduction or capitalization) and should not be lumped with general bank service fees.
3. Using "Financial Expenses" as a Tax Category: While useful internally, the IRS generally categorizes standard deductible business bank fees under Other Business Expenses, not a separate "Financial Expenses" category.

Key Considerations for Classifying Banking Fees

1. Business Account: Fees must relate to an account maintained for your trade or business. Using a dedicated business bank account simplifies tracking and justification.
2. Ordinary and Necessary: The fee must be a common and accepted charge for banking services helpful and appropriate for your business.
3. Distinguish from Interest/Loan Costs: Separate standard service fees from interest charges or fees paid specifically to obtain a loan.
4. Record-Keeping: Keep bank statements that clearly itemize the fees charged.

Tax Implications of Banking Fees

1. Deductibility: Ordinary and necessary bank fees charged on business accounts are generally deductible in the year paid or incurred.
2. Reporting: Deductible bank fees are reported under Other Business Expenses on the appropriate business tax schedule (like Schedule C).
3. Personal Fees: Fees on personal bank accounts are not deductible.

How Fyle Streamlines Expense Categorization and More!

Fyle simplifies tracking and managing banking fees, ensuring they are properly recorded and categorized for business records.

1. Automated Expense Tracking: Fyle can import business bank account or credit card statements (using bank feeds or statement uploads). Rules can potentially identify and automatically create expense entries for recurring fees based on transaction descriptions. Receipts for specific fees (like wire transfers) can also be submitted via Text, Email, Slack, or the Fyle app.
2. Real-Time Card Reconciliation: Track bank fees charged directly to business debit or credit cards linked to Fyle via real-time feeds (Visa/Mastercard), allowing for quick verification.
3. Automated Expense Categorization: Set up rules in Fyle to automatically categorize transactions described as "Monthly Service Fee," "Wire Fee," "ATM Fee," etc., under your internal "Bank Fees" category, linked to the correct GL code (likely mapping to "Other Expenses" for tax reporting).
4. Seamless Accounting Integration: Fyle syncs categorized bank fee data directly with accounting software (QuickBooks, Xero, NetSuite, etc.), reducing manual entry and ensuring fees are properly recorded in your financial system.
5. Customizable Approval Workflows: While less common for standard bank fees, workflows could be applied if specific transactions (like large wire transfers) require approval.
6. Detailed Reporting and Analytics: Generate reports to analyze total bank fees paid over time or identify specific types of fees (e.g., overdraft, wire) to understand banking costs better.
7. Compliance and Audit Trail: Fyle maintains a digital record of bank fee transactions pulled from statements or submitted receipts, providing documentation support for claimed deductions.

Key Clarification: Fyle assists in identifying, tracking, coding, and reporting bank fees recorded on statements or submitted as expenses. The business must ensure the fees pertain to a legitimate business account and are ordinary and necessary to claim them as a tax deduction under "Other Business Expenses."

FAQs Around Expense Categorization Of Banking Fees

Q1: Can I deduct the monthly service fee for my business checking account?

A1: Yes, the monthly maintenance or service fee charged on a business bank account is generally considered an ordinary and necessary business expense and is deductible.

Q2: Are ATM fees deductible?

A2: Fees charged for withdrawing business cash from an ATM using your business debit card are generally deductible bank fees. Fees for personal withdrawals are not.

Q3: What about wire transfer fees or overdraft fees on my business account?

A3: Wire transfer fees paid for legitimate business transactions are generally deductible. Overdraft fees incurred on a business account are also typically deductible as an ordinary business expense, assuming they occur occasionally in the normal course of business.

Q4: Can I deduct fees charged on my personal bank account if I use it for some business transactions?

A4: No. Fees charged on personal accounts are generally considered personal expenses and are not deductible, even if business income or expenses sometimes flow through the account. It's recommended to maintain a separate bank account exclusively for your business.