We have recently had questions from several clients asking why their NSF
fees were not classified as an interest expense. Our research led us to come
up with the following analysis.
Credit cards allow their users to not only make purchases of goods and
services, but to obtain cash advances as well, such as through the use of
convenience checks. According to the cardholder agreement, credit card
issuers are not required to honor any account checks for a user with a line of
credit that is overdrawn or would cause the user to overdraw. If the credit
card issuer decides not to honor such a check, then they are entitled to
impose a $25 fee on the user, known as the non-sufficient funds (NSF) fee.
In the federal income tax context, interest is something that is paid in
compensation for the use or forbearance of money. NSF fees are imposed on
a credit card user for attempting to draw additional funds out of an already
overdrawn account or for attempting to draw an amount of funds from an
account which would cause it to become overdrawn. As such, the credit card
user is denied the use of the credit card issuer’s money and so the NSF fee
cannot be labelled as interest.
While the NSF fee is not considered as an interest expense to you, if the
credit card is used exclusively for business purposes, it may be deductible as
a cost of operations, as a fee or other charge.
If your credit card or checking account is used exclusively for business
purposes, and if the event that fixes your NSF fee is imposed and the
amount of that fee can be determined to be associated with a business
expense, that NSF fee can be deductible as an operating expense.