Business Credit & Taxes 101: When are Business Credit Card Rewards Taxable?

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Rewards credit cards are offered to those who have proven they can effectively manage their financial world. Credit card issuers typically require that a rewards credit cardholder have an excellent credit score. Rewards credit cards can be a foolproof way to generate additional monies to buy a few extra goodies each year – free of charge. Rewards credit cards pay the cardholder ‘points’ just for using the credit card. Some rewards cards offer cash back directly while others issue ‘points’ which are converted to vouchers that can be used in a variety of ways. These include hotels, airlines, and shops, among others.  If you are debt-free and have the ability to pay off the balance on the card each month, why not get paid to simply spend?are business credit card rewards taxable

However, remain vigilant when using rewards credit cards, because each credit card issuer sets up their own rules,  so in order to maximize your rewards potentials, you must play according your bank’s  ‘rewards game.’

The income taxability of the rewards received from credit cards, according to the Internal Revenue Service (IRS), can potentially be treated as taxable income. In the personal rewards credit card realm, most rewards are determined to be a ‘discount’ applied to something you have already purchased. They consider the rewards to be similar to a ‘mail-in’ coupon where you receive your discount or rebate after the fact. As such, the IRS does not consider these types of rewards to be income.

So, a business credit card rewards taxable?

How Does the IRS Treat Business Credit Card Rewards Points?

Business purchases (and the rewards they generate) follow completely different IRS guidelines than those that apply to personal purchases. If you have a business rewards credit card, it is important to keep track of rewards earned because the ‘rebates’ received may potentially impact your tax liability. While the rewards (that lead to discounts on a purchase price) are not technically considered income, the manner in which the IRS handles them has definite business tax implications.

So, How Do Business Credit Card Rewards Affect Tax Liabilities?

The tax impact to a business receiving credit card rewards is very real.  A business’ tax burden occurs because it reduces the cost of the business expense – by the amount of the reward received. For example, let’s say your floral business buys a new piece of equipment that costs $400. In doing so, the business generates an $8 reward – 2% of the expense. From the IRS’ purview, the cost of your new business expense would be as follows: $392, not $400. As such, the cost of the business expense decreases. As a result, your tax burden increases because the lower priced expense will directly cause your net income to rise.

So, does this required accounting adjustment change how the IRS handles business rewards generated from credit card use? ? And, are business credit card rewards taxable?

Like most things in life – it depends! The IRS doesn’t ‘technically’ categorize credit card rewards as income. The IRS simply takes a slightly different perspective regarding credit card rewards. So, as a result, the IRS’ revised perspective reduces a business’ expenses, which ultimately increases the business’ income.

And the changes do not stop there. An employer may have a documented protocol where the rewards points earned by business purchases revert back to the employer. Double-check your employer’s policy in the employee handbook.

As a side note, for businesses whose capital flow is dependent upon a significant use of credit cards by their customers, there are receivable financing programs, which provide for additional control of the businesses’ capital management.

A Few Tricky Facets Regarding Business Credit Rewards

1. Ask yourself, are business credit card rewards taxable if you use your own personal credit card to charge reimbursable business related expenses?  The short answers is no! The IRS does not consider the rewards generated by your personal credit card income. So they won’t chase you if you have somehow underreported the rewards.

2. Does the IRS handle sign-up cash bonuses the same way as it handles business credit card rewards? It is prudent to pay close attention to the fine print regarding this IRS matter. Credit Card issuers have begun to offer rewards for signing-up for their credit card. And while there is nothing illicit about this, the credit card issuers have also added some relevant verbiage to their credit card agreement. In general, the added language forewarns credit cardholders that if their yearly rewards total exceeds a preset limit, they will receive a 1099 MISC form. In other words, the value of your rewards will be reported to the IRS as income you if you generate rewards exceeding the bank’s threshold.

3. Here are some types of rewards credit cards that aren’t considered income:

  • A sign-up bonus contingent upon a transaction
  • Travel miles bonuses
  • Cash-back programs
  • Accumulated points towards future purchases

4. However, for sign-up bonuses that have no required transaction, the IRS treats this as income and you will definitely receive a 1099 MISC form. Sign-up incentives are now contingent upon thresholds that apply to future spending of the credit cardholder. This simple requirement effectively negates your requirement to report it as income to the IRS.

5. The reality is that a credit cardholder that receives a sign-up bonus that is taxable can receive the bonus in the form of valuable reward, miles or a gift. You do not necessarily have to receive money in order for the sign-up bonus to be considered taxable.

5. Never ignore or leave off any 1099 MISC income from your filed income tax returns. The IRS is quite adept at pursuing those who neglect to report all of their income properly.

The Take-away

Rewards credit cards are a legitimate way to generate enough points to take a free trip or to buy a special gift for someone. But, be careful, as there are very specific rules to follow to stay within the IRS’ guidelines, and out of trouble. First, make sure the credit card issuer’s agreement does not state that you will receive a 1099 MISC at the end of the year. Business purchases that earn rewards must have their actual cost readjusted downward by the amount of the reward. This thereby increases the business’ net income.

If your situation is smack in the middle of one of the IRS’ guidelines ‘gray areas’, and continue to wonder if business credit card rewards are taxable, consider speaking with a business financing expert or a trusted tax expert. They can help you to determine when the rewards generated by a business credit card are taxable.  Avoid contacting the credit card company as they have ‘a dog in the fight’ in this situation and are likely to side with their own best interests. Effectively, this leaves you,  the credit cardholder swimming among the sharks without a lifeline.