What the IRS Has To Say About It
The IRS announced its position on whether credit card rewards are taxable in 2002: This advice covers frequent flyer miles and “in-kind” benefits, which roughly translates to “something similar.” The IRS takes the position that this includes cash back on credit card purchases, because you’re effectively getting a rebate on the money you already spent. According to the IRS, you don’t have to pay taxes on cash-back rewards any more than you would have to pay on that $50 rebate you got when you bought an appliance.
When a Reward or Bonus Might Be Taxable
You might be liable for taxes if you don’t make a literal transaction, such as if a card issuer offers you a referral bonus or if you got $700 to open an account, and that money is credited to your account before you ever use the card. That situation is more likely with bank accounts than credit cards. Either way, must these gifts be reported as income? “It depends,” said Chip Capelli, an accountant in Provincetown, Massachusetts. “Technically, this is interest paid to a customer, so it should be reported on Form 1099-INT to the customer. I’ve seen it happen, and I’ve seen it not happen.” Capelli said that Form 1099-INT is required when interest earned exceeds $10 in a year. Even if you don’t receive a Form 1099-INT, you’re required to report all interest income on your federal income tax return. Depending on the bank and how it classifies your bonus, there’s also a chance that you will receive a 1099-MISC. That form is required for many types of miscellaneous income, such as prizes or awards worth at least $600 and royalties worth at least $10. Sometimes a lender will send out the form, even if the bonus doesn’t technically trigger the need for a 1099-MISC form. In fact, some card issuers include warnings in their contracts that this might happen.
What About Business Purchases?
The same rule generally applies to business credit cards, but there’s something else to keep in mind with business cards and taxes. Maybe you have a consulting business, and you must travel to another city to perform services for a client. You spend $750 in travel costs, and you charge the expense to your business credit card. The credit card company says, “Great! Thanks for using our services. Here’s 2% cash back.” Your business can go ahead and pocket that $15 without reporting it as income, just as you could for a personal cash-back credit card reward, but you can’t also deduct the entire $750 cost of the trip as a business expense on your Schedule C. You can only claim a business deduction for $735, because that’s really all you spent after getting that 2% cash back. “If you have a business credit card, a good rule of thumb is that any rebates on those purchases are subtracted from the costs, reducing the amount that you can claim as an expense,” Capelli said. On the bright side, there’s that 2002 memo from the IRS. It says you don’t have to claim as income “the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel." In other words, you can personally use rewards accrued on business accounts without paying taxes on them, but you would still have to subtract the amount from any tax deduction you claim for your business.
Can You Give Credit Card Rewards Away?
Maybe you don’t really need that cash back, and you’re the altruistic sort. Maybe you’d rather make them a gift to a charity. If you do that, can you claim a tax deduction for it? No, said Capelli. “The IRS recognizes rewards points and miles as a gift or a reward from the corporation to the individual. Therefore, points and frequent flyer miles donated to charity are not considered tax-deductible. Another way to look at it is that the deductible amount is the lesser of the fair market value of the item basis, because you didn’t purchase them. Therefore, this is not a legitimate deduction.” So, taxpayers beware. Some credit card companies actually give you the option to send the money to a charity rather than have it applied to your card balance, but the IRS isn’t going to let you write the gift off.
