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Do You Owe Taxes on Credit Card Rewards as a Small Business

If you're a business owner, I'm guessing that you and your staff regularly receive credit card rewards. But have you ever wondered if these rewards are taxable? The answer to this question may surprise you.


Credit Card Rewards Have Been Increasing 


As a business owner, you’re probably looking for ways to save money. One way to do this is by using rewards cards that offer cash back or other perks, like travel miles and points. You can use your credit card rewards toward your business expenses and save some money in taxes at the same time.


Lately we’ve seen a major increase in how much credit cards and banks are offering as an incentive for people to sign up for new cards with them. The competition among banks has been intense since some of them started offering incentives like unlimited 1% cash back or 2% on groceries instead of just 1%. This caused other companies to join the fray by offering competitive rates versus what consumers were already receiving from their existing cards at other institutions before these changes took place.


A recent study by NerdWallet found that since 2011, airline rewards have increased by nearly 50%, while cash back rewards have increased by almost 60%.


The reason for these increases? According to NerdWallet: “Credit card issuers are locked in battle for your business and are willing to sweeten their deals in order to get you on board.”


Club Capital is the largest accounting and advisory firm for insurance agency owners in the country providing a one-stop financial infrastructure including monthly accounting, integrated payroll, CFO services, and tax preparation.  


Types of Credit Card Rewards 


When it comes to the types of rewards you can earn on a credit card, the list is pretty broad. 


Credit cards that offer cash back are by far the most popular—and for good reason: They provide users with an easy way to save money since you get a percentage of your purchase returned as cash. The percentage varies based on how much you spend each month and what type of card you have; some may offer 1% back across all purchases, while others might give 5% at grocery stores and 3% on gas purchases. Some cash-back cards offer additional bonuses like double or triple points for certain types of spending (like groceries) or for signing up for an online account.


Another popular type is travel rewards cards that offer points that can be redeemed for flights and hotel stays—either directly through the credit card company or through an airline or hotel chain's own loyalty program. These travel rewards can be very lucrative: if you're planning a vacation anyway, it could make sense to sign up for one of these cards so that you'll earn miles toward future trips without having to pay extra money out-of-pocket upfront.


But there are other kinds of rewards that can also be worth your while, including: 


  • Points, which can be redeemed for travel 
  • Miles, which can be redeemed for flights or hotel stays 
  • Travel credits, like airline reimbursements 
  • Airline miles
  • Hotel points 
  • Gift cards and 
  • Gift certificates 


Of course, not every type of credit card reward is created equal. Some may have better value than others when it comes time to redeem them or take advantage of them in some way after earning them through your spending habits. For example, if you're looking at using your credit card rewards as a way to get more out of each purchase you make on the card beyond just saving money off purchases entirely—such as using points towards free flights—then it's important to know which types will give you the best bang for the buck. 


Club Capital provides monthly accounting, tax, and CFO services for insurance agency owners. With 100% of our clients in the insurance industry, we are built to help you grow your agency faster with industry-specific accounting, tax, and CFO services.


Credit Card Rewards That Are Not Considered Income


In general, the IRS categorizes redemption of credit card rewards and frequent flyer miles as non-taxable.


Points, and similar rewards, are also not taxable. They're considered rebates, which the IRS does not tax when you use them for personal purchases or business expenses. The same goes for any points earned through a partner program—the benefits are more of a reward than anything else, so they're not subject to taxes in the same way that cash awards would be.


Credit Card Rewards That Are Taxable


In most cases, you won't have to worry about taxes on your credit card rewards. The IRS doesn't consider them income, so you won't owe any tax on the rewards you receive. However, there are some exceptions:


  • If you didn’t have to charge purchases on your card in order to receive a welcome or sign-up bonus, the value of that reward is considered taxable income. This means that when filing your taxes at the end of year, you will have to report this amount as income and pay income tax on it.


  • The value of the reward will be counted as income if it's given as a gift card or certificate that can only be used at certain stores or restaurants (for example, a $50 Amazon gift card).


  • If you use your credit card to get cash back from an ATM, this may be considered income because it's technically considered a withdrawal from your bank account rather than a purchase at a store or restaurant with your credit card. You should consult with an accountant before making a withdrawal of this type in order to avoid paying taxes on it.

If you do have a credit card with rewards, be sure to keep track of how much you spent on the card during the year and what type of rewards points or miles were acquired through those purchases. This information is necessary when filing taxes at the end of year as well because it can help determine if any portion of that reward money should be taxed as income or not.


Club Capital Is Here To Help


For the past 5 years, Club Capital has helped insurance agents better manage their agency's finances through best-in-class monthly accounting and tax services. Schedule a demo today!

By Club Capital | June 09, 2022 | Tax | 0 Comments

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