ARE BUSINESS CREDIT CARD REWARDS TAXABLE?

The General Rule

Before turning to the business context, one important question is whether credit card rewards in general are considered to be taxable income. Fortunately for cardholders and thanks for an IRS Revenue Ruling from 1976, the usual answer is no.

The logic that the IRS uses here is the same as gets used when you buy things using coupons or other discount offers. When a credit card offers cash back or airline miles to you in exchange for making a purchase, it's essentially reducing the purchase price of the thing you're buying. So if you have a standard 1% cash-back card and pay $100 for an item, you'll get cash back of $1 on that transaction. Rather than taxing you on the $1 in cash you get back, you're instead treated as if you had paid a net amount of $99 for the item you purchased.

However, more controversial is the situation in which you get a reward simply for signing up for a card. For instance, if you get a $100 sign-up bonus for opening a credit card account, there's nothing that you've necessarily had to buy to which you could apply the $100 as a discount. In those cases, some card issuers actually report the bonus as income on a 1099, and in that case, the IRS will see a red flag if you don't include it on your tax return.

The Business Difference

For business credit cards, the tax rules are applied differently because of the nature of the expenses. Business expenses are generally tax deductible by the owner of the business, and that changes the impact that a card reward has. Just as the IRS treats the cash back reward as a discount for personal purposes, it also sees the reward as a discount for business purposes. That's not the best answer for the business as the reward effectively reduces the net amount you spend on the deductible item. So in the case above, if you spent $100 on a tax-deductible business expense and got $1 back in cash rewards, the IRS would want you to account for the $1 and take a deduction only for the net amount spent of $99.

So far the IRS has been lenient on many rewards that businesses earn in the course of their work. For instance, flying for business but getting to keep frequent flier miles hasn't created a taxable event in the IRS' eyes. Credit card reward points have gotten treated the same way. There's a possibility that cash payments might get treated differently, but this hasn't gotten a lot of attention from tax authorities in recent years.

For the time being, we recommend using a business credit card with non-cash rewards like air miles or applying your cash back bonus to paying off your business credit card. As always, please contact us if you have a specific issue that you would like to discuss.