IRC Section 163(h)(2) clearly bars a deduction for personal (consumer) interest, but does not mention dealing with mixed charges. IRS Section 163(h)(2)(A) specifically excludes interest paid or accrued on indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee) from the definition of personal interest. As such, the interest associated with a credit card used solely for business purposes is plainly deductible as business interest.
An example of allocating interest between personal and business is a vehicle used partially for business and partially for personal purposes. The business use percentage is determined by the miles driven for business as compared to the total miles driven for the entire year. Thus, in this situation, it is easy to determine the percentage of the car’s consumer loan on which business interest is deductible.
However, when it comes to allocating the interest on a credit card that is used both personally and for business (mixed use), how does one allocate the interest among all of the ongoing charges and monthly installment payments. Although some part of the interest is deductible business interest, it is difficult to determine a proper allocation and in an examination, a tough thing to prove.
Moral of the story? Taxpayers should use separate credit cards whenever possible for business and personal purchases. Doing so will make proving the deductibility of the business interest much easier in an examination.