Rewards credit cards are very popular in the US for both individuals and businesses.
In 2017, Discover, American Express, and Capital One combined issued nearly $13 billion in credit card rewards, and that’s only 3 banks! JP Morgan alone issued $5.8 billion in credit card rewards to cardholders in 2018.
The rewards are often generated as sign-up bonuses, or through everyday spending, with bonus miles or rewards points for certain spending categories. Some individuals earn thousands of dollars of credit card rewards each year.
But are these credit card rewards and benefits taxable as income to you or your business?
The rewards generated by individual and business spend on individual and business credit cards are not treated as taxable income.
The IRS has not pursued enforcement against taxpayers for the tax-free accrual of credit card incentives. The IRS treats these rewards as a “rebate,” which they explained in this 2002 memo. This is similar to if you or your business purchase a washing machine and submit a “rebate” form to the manufacturer. The IRS does not treat that rebate as taxable income.
The IRS was even more clear in a 2010 memo: “Taxpayers will make purchases with the credit cards, and as a result of those purchases, will be entitled to receive rebates . . .The portion of the credit card purchases that taxpayers can . . . receive back in cash . . . does not constitute gross income to taxpayers.”
Regarding employees traveling on behalf of their employer and generating personal benefit such as airline miles, the IRS states, “Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”
However, the IRS warned that cash incentives and “incentives that are converted to cash” are not exempt. This creates uncertainty around cashback rewards or rewards that can be converted to cash, which is sometimes the case with certain programs.
The bottom line is there doesn’t seem to be any IRS enforcement. The IRS explained that there are numerous technical and administrative issues relating to these benefits on which no official guidance has been provided. . . Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits.
However, there are a few things you should be aware of if you are using a business rewards credit card for your business’s expenses.
Credit Card Rewards Can Impact Your Business’ Deductions
When a credit card company offers your business “rewards” for making purchases, including cash back, the credit card company is effectively giving your business a discount on the item.
For example, if your business credit card offers you 2% cash back and you purchase a business item worth $100, you will receive a $2 statement credit, for a net of $98. As explained above, the IRS treats it as a rebate. The IRS does not tax you on that $2 or treat it as income to your business.
However, the IRS treats it as if your business only paid $98 for the item. The reason this matters is that it impacts your business’s ability to deduct the full expense. The IRS wants your business to only deduct $98, not the full $100. This applies to business or self-employed individuals only, and not to individuals who work for a paycheck, since deductions of this sort are allowable only for business activities.
The effect of this is that it can increase your business tax bill by decreasing your allowable deductions. However, cash back rewards (essentially a credit) will likely be more valuable than the value of that deduction. It just creates a bit of a bookkeeping headache for you and your accountant. Check with your accountant about how to treat expenses that generate cashback rewards for your business.
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Credit Card Rewards Can Also Impact The Cost Basis Of Your Business’s Assets
For instance, if you purchased a piece of equipment with your business credit card for $25,000 and received 2% cash back, the cost basis of the equipment should be treated as $24,500 (98% of $25,000) instead of $25,000. This change impacts the way your business depreciates the equipment, and impacts any later capital gains or losses your business may realize when the equipment is sold. Check with a tax professional about how to treat the cash basis of items purchased that include cashback rewards for your business.
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If Employees Are Using Personal Rewards Cards For Business Expenses And You Are Reimbursing Them, Your Business May Be Losing Out
If your employee is using a personal card for business expenses and charging back expenses to the business, the IRS has generally been fairly lenient about the benefits such as frequent flyer miles that employee accrues. For employees who travel a lot, this can be a lot of miles and a very lucrative fringe benefit of their employment.
However, you may want to ask if that is the best option for your business, since your employee is charging expenses to their card, getting a tax free benefit, and still passing along the full expense to you for reimbursement. Your business may want to switch to making employees authorized users on the business’ credit card account and to start using corporate cards so that expenses are charged directly to the business.
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A Note About Bank Bonuses – They Are Different! And Taxable!
Have you ever received a promotional mailer or seen an ad for a bank account bonus? These incentives are frequently offered for personal and business accounts and can be for eye-popping amounts – as high as $750 for opening a new checking account. These rewards are treated differently by the IRS than credit card rewards. Cash or other incentives that you receive from opening a new checking or savings account are taxable. The IRS treats these bonuses as interest and you will receive a 1099-INT or sometimes a 1099-MISC.
If You Get A Tax Form, Pay Attention
Make sure to include income from checking or savings account bonuses on your individual or business tax return, where applicable. Keep track of all those 1099-INT and 1099-MISC forms!
In a 2014 court case, the IRS upheld this rule, arguing that a taxpayer who received frequent flyer miles for opening a new bank account with CitiBank needed to report the value of the points — $668 – as income on his tax return. Since CitiBank reported those miles as income from the customer opening the account, the IRS ruled that the taxpayer needed to report and pay taxes on them. Keep in mind, even if you don’t receive a 1099-INT for a checking or savings account bonus, you still need to report the bonus as income and pay the taxes owed.
Always consult with a tax advisor about your unique tax situation. This article is not tax advice.