Are business credit card rewards taxable?
Dear Credit Card Adviser,
As an employee for a tax-exempt organization, I charge many business expenses on my personal credit card and am later reimbursed. All of my credit cards earn rewards points. Am I doing something wrong by redeeming these points? Should I be claiming them as income?
The IRS doesn't generally classify credit card rewards points as taxable income.
Instead, "traditional credit card rewards programs, such as card points you can use for making purchases, typically are considered rebates," Bankrate's tax specialist Kay Bell says. "It's like when you buy a product and mail in a coupon for a rebate on part of that price. It's not income. It's a reduction in the purchase price."
Bell points to two older IRS rulings that offered some clarity on the issue: Announcement 2002-18, published March 11, 2002, which addresses airline frequent flier miles specifically, and a July 2002 private letter ruling to a cardholder who wanted to donate rewards program points to a charity.
The first ruling states that the IRS "will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flier miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel." The letter calls rewards "rebates" and states they "are not includible in Taxpayer's gross income."
IRS spokesman Anthony Burke confirmed that "generally, reward points are treated as reducing the purchase price paid for an item and are usually not included in the buyer's gross income."
There's also a ruling from January 1976 that establishes the agency's policy on rebates.
As a side note, there are times when a promotional offer featuring credit card rewards should be reported to the IRS. Essentially, any points, miles or cash back you receive without having to conduct a financial transaction -- like, say, make a purchase -- will be considered an award as opposed to a rebate and, thus, classified as income.
(You may recall Citi causing a kerfuffle a few years back when it sent cardholders a 1099-MISC tax form for the rewards miles they were gifted for simply signing up for a new checking or savings account.)
Most credit card sign-on incentives, however, feature spending thresholds. You won't get the rewards until you've charged a certain amount on the card, which negates the need to report the occurrence to the IRS.
Because you're asking about points earned on purchases, the award caveat doesn't apply so, no, you're not violating any tax laws. There is a chance, however, that your employer might have a problem with you redeeming rewards associated with business-related expenses.
For instance, "The employer may have a policy that all the points (on these purchases) revert to the company," says Barbara Weltman, tax attorney and author of "J.K. Lasser's 1001 Deductions & Tax Breaks 2014."
Review your employee handbook or check with a supervisor to make sure you aren't unwittingly violating existing policies and procedures and putting your job in jeopardy.
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