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Credit card rewards are a popular way to save money on everyday purchases, whether through cash back, points, or airline miles. However, many people wonder whether these rewards come with tax implications. In this blog post, I’ll answer some common questions about the taxability of credit card rewards, especially when used for personal and business expenses.
Are Credit Card Rewards Taxable?
The good news for most individuals is that credit card rewards are generally not taxable. The IRS typically treats rewards earned through spending as similar to a discount or coupon applied to a purchase. Just as you wouldn’t pay taxes on a coupon applied to your groceries, you typically don’t owe taxes on the rewards you earn by using your credit card.
However, there are some exceptions. If a reward is given without requiring a purchase, such as a sign-up bonus for simply opening a new account or “refer a friend” bonuses, these can be considered taxable income. In these cases, the IRS may view the reward as a type of payment rather than a discount, and you would need to report it on your tax return.
How Do Business Credit Card Rewards Affect Tax Deductions?
When it comes to business credit cards, the situation becomes a bit more complicated. Most businesses operate on a cash basis for tax purposes, meaning they deduct expenses when they pay for them. Rewards received from business credit card spending are treated by the IRS like a discount on those expenses.
This can have a significant impact on your business taxes. Let’s break it down:
When you use a credit card to pay for a business expense and receive rewards, the IRS will view those rewards as reducing the total cost of the expense.
Since the deduction you take on your tax return is based on the actual cost to your business, the value of the rewards reduces the amount you can deduct.
As a result, fewer deductions means more taxable income, which could lead to a higher tax bill.
For example, if your business earns $500 in cash back rewards, that’s $500 less in expenses you can deduct. While these rewards are a great way to save money, they can indirectly increase your taxable income by reducing deductible expenses.
What Are Some Situations Where Credit Card Rewards Are Taxable?
In addition to sign-up and referral bonuses mentioned earlier, there are a few other scenarios where credit card rewards may be taxable. For example:
If an employee uses their personal credit card for a business expense and earns rewards, those rewards might be taxable to the employee, since the rewards are earned from a business transaction but credited to the individual.
Additionally, in some cases, receiving promotional rewards or incentives that don’t require a purchase can be considered taxable income.
In summary, while most credit card rewards are not taxable, there are specific situations where they could be. It’s essential to understand how the IRS views rewards, especially for business expenses, where they can affect tax deductions and potentially increase taxable income.
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About the Author:
David Peters, CPA, CFP, ChFC, CLU, CPCU, CGMA, is the Founder and Owner of Peters Professional Education (petersprofessionaleducation.com) and Peters Tax Preparation & Consulting, PC. David Peters is also registered with the U.S. Securities and Exchange Commission (SEC) as an Investment Advisor Representative (IAR) with Peters Financial LLC. He regularly teaches courses in accounting, finance, insurance, financial planning, and ethics throughout the United States, and regularly contributes regularly to various professional publications, including NCACPA’s Interim Report, SCACPA’s CPA Report, and VSCPA’s Disclosures.
Required Disclosure:
The content presented above is for informational purposes only, is general in nature, and is not intended to and should not be relied upon or construed as a financial plan or financial/investment advice regarding any specific issue or factual circumstance.
Financial and investment advisory services offered through Peters Financial LLC. Brokerage and custodial services offered through Charles Schwab Co. Inc., member FINRA and SIPC. Peters Financial LLC and Charles Schwab Co. Inc. are not affiliated. David Peters also offers tax services through Peters Tax Preparation & Consulting, PC. Peters Tax Preparation & Consulting, PC is not affiliated with Peters Financial LLC and clients or prospective clients are never obligated to use Peters Tax Preparation & Consulting, PC. as part of any financial planning or investment management services offered by Peters Financial LLC.
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