What expense category is Plaid Expenses?

In today's digital economy, the ability to securely connect with customer bank accounts for verification, payments, and data analysis is essential. Plaid has emerged as a leading financial technology platform that makes these connections possible for countless businesses. While invaluable, the fees associated with Plaid's services can be a point of confusion for accountants and SMB owners: 

How should they be categorized for accounting and tax purposes?

Properly classifying Plaid expenses is key to understanding your operational costs, maintaining accurate financial records, and ensuring you are taking the correct tax deductions. This guide will clarify the appropriate expense category for Plaid, the key IRS rules that apply, and the tax implications for your business.

Plaid Expense Category

Plaid provides a business-to-business financial technology service. The fees a company pays to use Plaid's API and platform are operational costs. In your accounting system, these expenses are best classified under a category like "Software and Subscriptions" or, more broadly, "Technology Expenses." Some businesses might also categorize them under "Bank Fees" if Plaid is used primarily for payment processing and verification.

The crucial point is that these are costs for using a service, not for purchasing a tangible asset.

Key Rules for Classifying Plaid Expenses

All business expenses must meet certain IRS criteria to be deductible. Here’s how to apply those rules to your Plaid expenses.

An Ordinary and Necessary Expense

To be deductible, an expense must be both ordinary and necessary.

• An ordinary expense is one that is common and accepted in your industry.
• A necessary expense is one that is helpful and appropriate for your business.

For any fintech, e-commerce, or modern service business that needs to verify customer bank data, process ACH payments, or analyze financial transactions, Plaid's services are a clear example of an ordinary and necessary expense.

A Currently Deductible Service Fee

The fees you pay to Plaid are for the use of their platform and services. You do not own the underlying technology. Because these costs are for services consumed in your daily operations and do not create a long-term asset, they are currently deductible business expenses.

This is different from purchasing an "off-the-shelf" software license that you own outright. Such a purchase would be a capital expense that must be depreciated over time or expensed under Section 179. Plaid's recurring fees are treated like other operating costs, such as rent or utilities.

Startup Costs

If you incurred costs to integrate Plaid before your business officially began its main operations, these expenses may need to be treated as startup costs. The IRS allows you to deduct the first $5,000 of startup costs in your first year, with any remaining amount being amortized (deducted in equal parts) over 180 months.

Examples of Plaid Expenses

The following are common examples of costs from Plaid that fall into this expense category:

• Monthly or annual subscription fees for access to the Plaid platform.
• Per-transaction or per-API call usage fees.
• Charges for specific Plaid products, such as Identity, Auth, Balance, or Transactions.
• One-time setup or implementation fees charged by Plaid.

Tax Implications of Plaid Expenses

Deductibility and Reporting

Fees paid to Plaid for services rendered are fully deductible as an ordinary business expense in the year they are incurred.

• For Sole Proprietors: These expenses are reported on Schedule C (Form 1040). They can be included under "Legal and professional services" or, more commonly, as one of the "Other expenses."
• For Corporations and Partnerships: These are deducted as a standard operating expense on the appropriate business tax return (e.g., Form 1120 or Form 1065).

Recordkeeping for Substantiation

To claim a deduction for Plaid expenses, you must maintain clear and accurate records. Your documentation should identify the payee (Plaid), the amount paid, proof of payment, and the date of the expense. The best records for substantiating these costs are:

• Monthly invoices and usage reports from Plaid.
• Credit card statements or bank statements showing the payments.
• The service agreement or contract with Plaid.

Automate Your B2B Software Expense Tracking with Fyle

Keeping up with recurring invoices from technology vendors like Plaid can be a manual and time-consuming process. A missed invoice can lead to inaccurate financial reports and a lost tax deduction. Fyle is designed to put this entire process on autopilot.

• Never Miss a B2B Invoice: Fyle's integrations with Gmail and Outlook automatically find invoices from your vendors in your inbox, create a precise expense record, and attach the invoice as documentation.
• Real-Time Corporate Card Feeds: When Plaid fees are charged to a corporate card, Fyle captures the transaction data in real time, automates the expense creation, and simplifies reconciliation.
• Create an Audit-Proof Trail: By centralizing every invoice and proof of payment, Fyle builds the robust, audit-ready documentation required by the IRS to substantiate every technology expense you claim.
• Seamless Accounting Sync: Fyle syncs every categorized expense directly to your accounting software, including QuickBooks, NetSuite, Sage Intacct, and Xero, ensuring your books are always accurate and up-to-date.

Focus on leveraging technology to grow your business, and let Fyle automate the expense management behind it.