NSF Charges

Today TaxMama hears from Toni in the TaxQuips Forum. She just wants to confirm. “NSF charges are allowable, aren’t they?  Years ago, as an auditor, I used to disallow them. At some point I was told by either review or appeals that they are allowable.  I still don’t think they should be & a client who racks up thousands each year said he was told they are not allowable, but doesn’t remember where he heard that.” https://taxmama.wpengine.com/forum/taxquips/nsf-charges/

Hi Toni,

 Let’s face it, NSF’s are not a standard, sensible practice in a business.  There’s really no excuse for a long string of NSF fees.  If you don’t have the money – don’t send out the check. Simple.  All that does is generate hostility from your vendors – who face corresponding NSF fees when your checks bounce. Sending out bad checks is a really bad business practice. It may buy you a little time – but it will cost you long-term credibility.

The infrequent fee is common – reconciling errors, math errors, etc.  Those are, and should be allowed.

I don’t remember seeing anything that says a high volume of NSF fees are allowable. They are not a function of an ongoing business.

 Personally, I tell my clients they may not deduct them. If that’s what it takes to prevent them from such destructive behavior, so be it.

But, looking at the law…IRS insists that credit card NSF fees are income to the credit card issuer. So the logical corollary should be that they are deductible to the payer. https://www.irs.gov/irb/2007-03_IRB/ar06.html

In one discussion forum, someone posted that Pub 334 says bank fees are deductible. Oh brother. That reference is to routine bank fees – like the monthly fee, the fee to receive the paper copies of your checks, the fees to get checks printed, etc.  That doesn’t refer to overdraft fees.

The old standard “ordinary and necessary” will still hold true. Excessive NSF fees are not a normal cost of doing business. $50 a month, maybe. $500 per month? That’s purely bad management and poor vendor relations.

And remember, you can find answers to all kinds of questions about bounced check charges and other tax issues, free. Where? Where else? At www.TaxMama.com.

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