Generally, Credit Card Rewards Are Not Taxable
When you earn points or cash back as a percentage of your credit card spending, these rewards aren’t viewed as taxable income by the IRS. They’re considered rebates or discounts. You’re just getting back some of the money you already spent.
This is also the case if you take advantage of a typical sign-up bonus from a credit card company, such as the chance to earn extra cash or rewards points when you spend a specified amount during the introductory period (for example, charging $1,000 in the first three months).
Whether it’s a promotional bonus or everyday rewards, if you spent money to get the rewards, they’re not taxable income.
Other Perks May Be Taxable
Bear in mind, there are times when a sign-up bonus from a bank is taxable income.
Here’s an example. Say you receive a bonus for opening a new bank account. If you don’t have to spend money to receive this award, it isn’t a rebate. It’s taxable. This is also the case if you open a credit card and receive a bonus or award without having to meet any spending requirement.
If the award is $600 or more, your financial institution will send you a 1099-MISC tax form. You’ll need to report this income on your tax return.
Deducting Business Expenses
When you earn business credit card rewards, your simplest option is to spend your points or cash back on business expenses.
Just remember, these purchases are not tax-deductible business expenses. Any points or cash back that you use to cover business needs were already paid for with previous purchases.
If you travel for business and decide to use your credit card rewards to cover a $400 hotel bill, none of this amount can be claimed as a business expense. If you use rewards to pay for half the bill and pay for the rest in cash, you can claim only the amount that you pay out of pocket.
If you have questions about reporting business expenses, be sure to check with your tax advisor.
Three Uses for Credit Card Rewards
If you rely on your card often, such as for business travel, it can be easy to rack up rewards. You’ll need to decide on the best way to use them. Here are your options:
- Put the rewards back into your business. They can bring a boost to your cash flow by defraying the cost of business travel, new office supplies and other expenses.
- Save them for yourself. Since business expenses paid with credit card rewards aren’t tax-deductible, you may not have a compelling reason to reserve these rewards for your business. While you should always keep business and personal spending separate, you may choose to put your business credit card rewards toward personal purchases such as a family vacation.
- Treat your employees. Show your appreciation by using your rewards to buy gifts for your staff during the holidays. In this case, the gifts are paid for by your credit card company, not your business, so you won’t have to report them as employee income.
Create a Plan
Even though regular credit card rewards aren’t taxable income, how you use them may have tax implications or affect your business in other ways.
- Talk to your tax professional. Discuss your plan for using your business credit card, how you’ll spend rewards points and whether this affects your business taxes.
- Coordinate with your partners. If you’re a sole proprietor, you can use credit card rewards as you see fit. But if you have business partners, be careful to avoid conflicts over who gets to use these rewards or how they’re divvied up. In your business’s operating agreement, include a section that outlines company credit card use, including how rewards will be used.
- If in doubt, use rewards for your business. To avoid disagreements with your partners and maintain a strict separation between your business and personal finances, you may prefer the simplicity of using credit card rewards only for business expenses.
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The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Amegy Bank.