If you're using business credit cards to earn rewards, you may wonder whether those rewards are taxable. The good news is that most of them aren't, but that's not true for all of them.
This post provides information on rewards that might be taxable and which ones might not, so you'll know what to flag and claim as income for your accountant.
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Rewards that may be considered taxable income
Although you may not have to pay taxes on most credit card rewards, the Internal Revenue Service (IRS) does consider some credit card rewards taxable.
Here are some common credit card rewards that may be subject to taxation.
Intro bonuses
A credit card issuer may offer an intro bonus for opening a new account. These intro bonuses can come in various forms, such as cash or points, and are often contingent upon meeting a minimum spending threshold.
For tax purposes, these bonuses may be classified as interest income. If so, you'll have to pay taxes on them and they need to be reported on your tax return.
Referral bonuses
Referral bonuses are rewards given to cardholders who successfully refer new clients to a credit card. If you receive points or cash for referring someone to the credit card company, this bonus is often treated as income because it's compensation for helping the bank acquire a new customer.
If treated as compensation, these bonuses are taxable credit card rewards and need to be reported.
Rewards not considered taxable income
On the other hand, the IRS treats most credit card rewards earned from regular card usage as not incurring tax liabilities. If so, they're treated as rebates rather than income because it's just money you're saving on your expenses. They aren't really additional income, so you don't have to pay taxes on them.
Here are a few examples of credit card rewards that aren't taxable.
Types of credit card rewards that are not taxable
No matter what form the rewards come in, the key to rewards that aren't taxable is that they're tied directly to your spending and they only represent savings on that spending—not additional income.
Cashback on spending
Cashback that you earn from spending is not taxable income—you don't have to pay taxes on that cash.
Even if you get extra cashback on certain categories, those credit card rewards still represent money you saved on your expenses, not additional income you earned. As far as the IRS is concerned, it's not taxable income.
Miles based on your spending
Some credit card rewards programs offer miles instead of cashback. The good news is that the taxability of credit card rewards isn't tied to the form or percentage of the reward program.
Because you're getting a certain number of miles for every dollar you spend, those miles are treated as spending rebates, not income. According to the IRS, they're not taxable.
Points earned on purchases
As long as the points were earned on everyday purchases, not a special sign-up bonus or referral, they're not considered taxable income. It doesn't matter that the credit card rewards are points instead of cashback or miles.
The IRS views all of these as discounts or rebates on spending, similar to the way coupons work. Since the rewards are tied directly to your spending, they aren't additional income and you don’t need to report them.
Do you need to report credit card rewards on taxes?
You only need to report credit card rewards on your taxes if they're classified as taxable income. Check out the table below for a quick reference—the taxable rewards have to be reported.
Are business credit card rewards taxable?
Here’s a quick reference table of business credit card rewards showing which ones are taxable and which ones aren't.
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FAQ
Here are answers to some commonly asked questions concerning credit card rewards.
How are credit card rewards treated in accounting?
Credit card rewards are typically treated as either income or a reduction in expenses. The difference is an attempt to reflect the nature of the credit card rewards programs and comes down to whether the rewards are taxable.
Rewards earned as a percentage back on your company's everyday purchases are not taxable. These rewards are not counted as income on financial statements, but instead reduce the overall expense of the purchase. They're treated in the accounting books as a rebate that reduces the company's expenses.
However, rewards earned for referrals or as a sign-up bonus are taxable. These rewards are treated in the accounting books as income and should be included as income on financial statements.
Are cashback credit card rewards taxable?
Cashback credit card rewards are generally not considered taxable income by the IRS. The IRS views these rewards as a rebate rather than income, as they're considered a reduction of the purchase price rather than additional funds.
However, there are some exceptions, such as when the rewards are given in exchange for opening a new account or meeting certain spending thresholds. It's always a good idea to consult with a tax professional to determine the tax implications of your specific credit card rewards.
Disclaimer: This content is for informational purposes only and does not constitute tax advice. Please consult your CPA or tax advisor for guidance specific to your situation.
