Signing up for a business credit card can be smart since a dedicated business card can help you keep personal and business expenses separate. Not only that, but business credit cards come with an array of benefits ranging from consumer protections to cash back and travel rewards for each dollar you spend.
Still, it’s easy to get confused about the rewards you earn with a business credit card and how they’re treated by the Internal Revenue Service (IRS). You may even be wondering, “Are my business credit card rewards taxable?”
In plain language, no, your business credit card rewards are not considered income and, therefore, are not taxable. Instead, 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.
Are business credit card rewards taxable?
It’s nice to know cash back earned with a rewards credit card for business won’t be taxed if you earned those rewards based on a percentage of your spending. Fortunately, this general rule also applies to other types of rewards you earn with a business credit card as a rebate, including hotel points and airline miles.
According to the IRS, there are a number of issues related to the benefits from business credit cards, such as how and when income is valued and how to identify “personal use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures,” for which there are no official guidelines. As a result, the IRS “has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles.”
The difference between awards and rewards
However, there are some instances where rewards could be taxed. For example, you do typically have to pay income taxes on bonuses earned for opening a new checking or savings account, including business bank accounts. That’s because these accounts don’t require you to spend money to receive a rebate.
And, for the most part, that’s the main difference between rewards that are taxable and those that are not. Credit cards require you to spend money to earn cash back or travel rewards, which are then returned to you as a rebate on your spending. If you’re earning any kind of bonus from a financial institution and you don’t have to spend any money to receive it, on the other hand, you should expect to receive a 1099-INT tax form in the mail. Note: This is the same form banks send you to report interest you’ve earned in a checking account or high-yield savings account.
How to treat business expenses purchased with your rewards credit card
For the most part, business expenses covered with your rewards credit card aren’t any different than if you had paid with a check or cash. However, there is one difference to be aware of if you use rewards to cover some of your business-related expenses.
Namely, if you redeem rewards to cover part of a business-related purchase, you can only deduct the amount you actually paid for the purchase as a business expense on your taxes. For example, if you redeem $200 in cash back to pay for part of a $600 flight to a business meeting, you could only deduct the $400 you paid out-of-pocket as a business expense.
Also, if you redeem rewards to cover a business-related purchase entirely, then you cannot deduct that expense on your taxes at all. Considering how valuable travel rewards can be, this is actually a fairly common occurrence. It’s not too difficult to earn enough airline miles to cover a flight entirely with miles or to pay for several nights at a top tier hotel or resort for a business stay. There’s a lot of value in redeeming your rewards for personal or business travel, however, so redeeming your points this way can still be a good deal.
How to best use your business credit card rewards
There’s no “right” or “wrong” way to redeem rewards you earn with a business credit card, and they’re truly yours to spend. If you’re a business owner wanting to maximize business-related tax write-offs, however, it can be smart to pay for business expenses with cash and use your rewards for personal splurges and travel for your family. For example, you could:
Sign up for a business credit card that earns flexible travel rewards
Then redeem your points for travel, gift cards and more. The Ink Business Preferred Credit Card is an excellent option to consider since the rewards you earn can be redeemed for 1:1 transfers to airline and hotel partners like World of Hyatt, Marriott Bonvoy, United MileagePlus and Southwest Rapid Rewards. You can also cash in points for travel through the Chase portal (and get 25 percent more toward travel when you redeem rewards), or for cash back, gift cards, merchandise or experiences.
Earn cash back to spend however you want
The Capital One® Spark® Cash for Business is an excellent card for this effort since you earn 2 percent cash back for each dollar you spend and you can redeem rewards to cover any purchase made to your card.
Earn hotel or airline rewards
If you’re a business traveler who is constantly on the road or in the air, it can make sense to focus your loyalty with a specific airline or hotel program — and perhaps even both. You can earn more points for your spending and reach elite status faster with an airline credit card or hotel credit card made specifically for small businesses.