Have you been contemplating whether the rewards you earn on your business credit cards are taxable or not? Or, perhaps you’re curious about how the IRS views these rewards. Fear not, this article will take you through everything you need to know about this topic. We’ll unravel the mystery behind the tax implications of your business credit card rewards, explaining which ones are taxable and which ones are not.
What’s The Basic Ruling on Business Credit Card Rewards?
In simple terms, business credit card rewards are not considered income and are, therefore, generally not taxable. The Internal Revenue Service (IRS) views these rewards as rebates on the purchases you’ve made using your credit card.
But obviously, it’s not that simple. We need to understand more about the categorization of these rewards.
The rules are a bit different for business credit card rewards. You should keep track of any cash back, points, or miles you earn on a business credit card because you will have to subtract the value from your reported business expenses.
Credit Card Rewards for Business: Taxable or Not?
There’s a bit more nuance to this topic, and it’s essential to understand when these rewards might fall under the tax radar.
When are Credit Card Rewards Taxable?
Certain credit card rewards could potentially be taxable. This primarily applies to rewards earned without spending any money or rewards that are not directly linked to a purchase. For instance, a sign-up bonus awarded without a minimum spending requirement, or a referral bonus received for encouraging someone to open a new credit card, are considered taxable income.
When are Credit Card Rewards Not Taxable?
Most credit card rewards, including those earned through business expenses, are not considered taxable. This is because they are seen as rebates on the purchases made. For instance, if a store offers you a $10 mail-in rebate after buying a $100 toaster, the rebate is not seen as income, but as a way to make the product more affordable.
Avoiding Taxes on Your Rewards Credit Card
The key to avoiding taxes on your credit card rewards lies in how these rewards are earned. If they’re earned through purchases, then they’re generally considered non-taxable. Always ensure that the rewards you’re aiming for are tied to a specific spending requirement.
Key Points
- Business credit card rewards are typically not considered income and therefore, are not taxable. They’re seen as rebates on items purchased with a credit card.
- If you’re earning any kind of bonus from a financial institution without having to spend money to receive it, be prepared to pay taxes.
- When paying for business expenses with reward points or miles, remember you can’t deduct these expenses as business purchases since they weren’t technically paid for.
What Does The IRS Say?
According to the IRS, business credit card benefits are somewhat complicated due to issues such as how and when income is valued. As a result, there are no specific guidelines on personal use benefits attributable to business expenditures. This is why the IRS hasn’t pursued a tax enforcement program on promotional benefits such as frequent flyer miles.
The Difference Between Awards and Rewards
| Criteria | Awards | Rewards |
| Taxable | Depends on circumstances. | Not considered taxable income in the case of business credit card rewards. |
| Examples | Bonuses earned for opening a new checking or savings account. | Business credit card rewards. |
| Requirement | Not always required to spend money to earn them. | Often required to spend money to earn them. |
Frequently Asked Questions
1. How do you record credit card rewards in accounting?
You can account for credit card rewards by recording them in the “Other Income” or “Credit Card Credit” sections of accounting software such as QuickBooks.
Personal credit cards
You only need to account for credit card rewards that you receive without having to spend any money. The IRS considers these types of credit card rewards to be taxable income.
Business credit cards
The rules are a bit different for business credit card rewards. You should keep track of any cash back, points, or miles you earn on a business credit card because you will have to subtract the value from your reported business expenses.
2. How do you redeem credit card rewards?
You can redeem your credit card rewards online, through the issuer’s mobile app, or over the phone, depending on the card. The most common credit card rewards redemption options include cash back, travel purchases, and gift cards.
Types of Credit Card Rewards
Points, Miles, and Cash Back are the three main types of rewards. Points and Miles are typically associated with travel and hotel benefits, while Cash Back returns a portion of your purchases as rewards.
How to Redeem Your Credit Card Rewards Online?
- Log in to your online account.
- Click on your rewards balance.
- Select how you’d like to redeem your rewards.
- Redeem your rewards. Your account will usually be credited within 2-3 business days.
3. How does cashback work on credit cards?
Cash back on credit cards rewards cardholders for making purchases by returning a percentage of the money spent. The accumulated cash-back rewards can then be used in a variety of ways, such as paying your credit card bill, getting a check, or making a direct deposit to a bank account.
Takeaway
To sum up, most business credit card rewards are seen as rebates, not income, and are therefore typically not taxable. However, there can be exceptions, and it’s always crucial to stay updated on IRS policies. When in doubt, consult with a tax professional to avoid any potential issues.
