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A business credit card can be a valuable tool, and that’s particularly true if you choose one that offers cash back or travel rewards. Still, it’s easy to get confused about the rewards you earn with a business credit card and how the IRS treats them.
If you’re wondering whether business credit card rewards are taxable, the simple answer is no.
Your business credit card rewards are not considered income and, therefore, are not taxable. Unlike money earned through traditional work, credit card rewards are considered rebates on items you purchased with a 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 for your business in the form of cash back, a statement credit, a gift card or a travel credit, you won’t pay taxes on those rewards.
What the IRS says about business credit card rewards
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 several issues related to the benefits of business credit cards. These include 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
While credit card rewards earned with a business credit card are not considered taxable income, there are instances where other types of rewards require you to pay taxes.
A common example includes bank account bonuses you earn for opening a new checking or savings account. These bonuses are different because you are not required to spend money to earn them; thus, they are not technically rebates.
And, for the most part, that’s the main difference between taxable rewards 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 that this is the same form banks send you to report interest you’ve earned in a checking account or high-yield savings account.
What about deducting business expenses?
For the most part, paying business expenses with a credit card isn’t any different than if you had paid any other way, such as with a check or cash. However, some nuances come into play when you use credit card rewards to cover business purchases.
Specifically, you cannot deduct business-related purchases as a business expense if you pay for them with credit card rewards. If, for example, you used miles you earned with a credit card to pay for an $800 flight to a business meeting, you couldn’t deduct the cost of that flight as a business expense on your taxes since you didn’t pay money for it.
Also note that this is true whether you pay for an expense entirely with rewards or only partly with rewards. In the case of an $800 business flight where you covered $400 of the cost with rewards and paid the $400 difference in cash, you could only deduct the amount you paid out of pocket ($400) as a business expense.
Considering how valuable travel rewards can be, this is 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 points for personal or business travel.
There is also a good argument for using points and miles for personal travel only. With this strategy, you benefit from deducting business expenses as they occur, and you get to save your rewards for fun instead of work.
The bottom line
Your credit card rewards are not taxable, but there can still be tax implications depending on how you use them. If you pay for business expenses with reward points or miles, you won’t be able to deduct those expenses as business purchases since you didn’t technically pay for them.
One way for small-business owners to have their cake and eat it, too, is to pay for business expenses on their card to claim deductions and earn rewards, and then use the rewards for personal travel and spending. However you choose to redeem your credit card rewards, you can rest easy knowing that you won’t be taxed for earning them.