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As tax season approaches, you may have many questions. Changes in tax laws are leaving many business owners and employees, alike, confused.
If you’re wondering, “Are my business credit card rewards taxable?” Bankrate can help.
Business credit card rewards are rebates, not gifts
In a letter dated September 11, 2009, the IRS made a ruling on credit card rewards that is now part of Internal Revenue Code. The ruling clearly states, “The portion of the credit card purchases that Taxpayers can … receive back in cash… does not constitute gross income.”
In plain language, no, your business credit card rewards are not considered income and, therefore, are not taxable. Credit card rewards are considered a rebate on the items you bought with your credit card.
If you purchase a product and then submit the manufacturers’ rebate form to receive a check, that money is also not taxable. Similarly, if you use an app such as Ibotta to earn cash rebates on your purchases, this is also not taxable income.
So, rest easy. Whether you receive your credit card rewards in the form of cash back, a statement credit, a gift card or a travel credit, you won’t pay taxes on those rewards.
Credit card rewards and charitable contributions: It gets even better
The IRS ruling also states that your rewards aren’t taxable even if you choose to donate them to a 501(c)(3) charitable organization.
Better yet, the IRS ruled that you can deduct that contribution as a charitable donation if you itemize your taxes. It’s almost like having your credit card rewards pay you twice!
How to treat business expenses purchased with your rewards credit card
As you might expect with all things tax-related, however, there are some caveats. Here’s where it gets complicated.
If you use your business credit card for a business-related expense that you plan to deduct from your taxes to reduce your gross income, you can only deduct the purchase price of the expense minus the actual cash value of the rebate or rewards you received.
For instance, let’s say you buy an office printer for $200 at an office supply store using your Bank of America® Business Advantage Cash Rewards Mastercard® credit card and earn 3% cash back. You can claim only $194 of the purchase price as a business expense.
Don’t let that deter you from accruing those rewards points, though. Since business expenses are treated as tax deductions, and not tax credits, you aren’t losing much. Your 3%, non-taxable rewards may be worth even more than that $6 income deduction.
And with fewer Americans itemizing their expenses under current tax laws due to a higher standardized deduction, unless you’re the business owner or you file as self-employed, you may not have to worry about deducting the cost of individual items, such as office supplies, anyway.
Awards and rewards: Understand the difference
Several years ago, Citi® customers received a surprise. The financial services company issued 1099-MISC income forms to their customers who earned more than $600 in bonus awards for opening an account. A 1099 form is a declaration of income often sent to independent contractors or anyone that earns more than $600 from any single source in a calendar year.
If your credit card rewards are not tied to a purchase, they can be considered taxable income. Fortunately, today, most top rewards credit cards, including business rewards cards, require a minimum purchase, usually within the first three months, to earn your sign-up bonus. That makes the bonus a “rebate” on those initial purchases, rather than a cash award, and, again, rebates are not considered taxable income.
How will you use your business credit card rewards?
Of course, before you redeem your business credit card rewards for personal travel, purchases, or cash back, check with your employer. They may have specific policies stating that rewards should go back to the company when a business credit card is used to cover employee expenses.
But if the credit card is your own and you are responsible for the bill, you should enjoy those rewards. Most employees are no longer permitted to deduct non-reimbursed work-related travel expenses, according to new tax laws introduced in 2018 and expected to remain in effect until 2026.
Bottom line: Continue to rack up your rewards on the best business credit cards and cash them in for money, merchandise or whatever you desire, tax-free.