Important lessons learned
1.] Rewards from business credit cards are not taxable since they are not regarded as income. Rather, credit card rewards are regarded as refunds for things you used a credit card to buy.
2.] You should anticipate paying taxes if you receive any type of bonus from a financial institution that doesn’t need you to spend any money to obtain (such as a bonus for opening a savings account).
3.] You will not be allowed to deduct business expenditures as purchases if you pay for them using rewards points or miles because you did not really make the transaction.
If you select a company credit card with cash back or travel incentives, it can be an especially useful financial tool. However, it’s simple to become perplexed about the benefits you receive from a company credit card and how the IRS views them.
The short answer to the question “are business credit card rewards taxable?” is “no.” The rewards on your company credit card are not taxable because they are not regarded as income. Credit card rewards, as opposed to money obtained through regular employment, are regarded as refunds for goods you have paid with a credit card.
The money you receive after making a purchase and submitting the manufacturer’s rebate form to get a cheque is likewise not subject to taxes. Similarly, cash rebates earned from purchases made via an app like Ibotta are not taxable income.
You won’t be required to pay taxes on any credit card benefits you receive for your business, regardless of whether they come in the form of cash back, gift cards, statement credits, or travel credits. Continue reading for a more thorough explanation of business credit card rewards and the IRS.
The IRS’s position on rewards from corporate credit cards
Points, cash back, or miles are the most common forms of rewards offered by business credit cards. The IRS approaches each as follows:
Refundable cash
Cash back benefits are handled similarly to rebates, as was previously indicated. Because of this, if the cash back you receive from a business rewards credit card is determined by a percentage of your spending, you won’t be subject to taxes on it.
Miles and points
The same general idea holds true for other rewards, such as hotel points and airline miles, that you could earn as a refund with a corporate credit card.
The IRS lists a number of considerations pertaining to the advantages using company credit cards. These include the methods and timing of revenue valuation as well as the devoid of official rules method of distinguishing “personal use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures.”
Consequently, the IRS has refrained from pursuing a tax enforcement programme concerning promotional incentives like frequent flyer points.
Which awards for businesses are taxable?
Certain rewards come with a tax obligation, even though credit card points obtained with a business credit card are not taxable as income.
One typical illustration would be the benefits you receive from banks when you create a new business checking or savings account. These incentives aren’t really rebates because you don’t have to spend money to get them, which makes them unique.
That is, for the most part, the primary distinction between rewards that are taxable and those that are not. A 1099-INT tax form may arrive in the mail or through your bank’s online portal if you’re receiving a bonus of any kind from a financial institution and it doesn’t cost you any money. Just in case your bank sends it one way and not the other, be sure to check both. Keep in mind that banks will also give you this form to record interest earned on a high-yield savings account or checking account.
Paying for business expenses with rewards
When it comes to paying company expenses, using a credit card is largely the same as using any other payment method, such cash or a cheque. But when you utilise credit card rewards to pay for company expenses, there are a few things to consider.
The most important thing to remember is that using credit card rewards to pay for business-related items does not allow you to deduct those expenses from your taxes. For instance, you could not deduct the $800 travel cost as a business expense on your taxes if you paid for it using credit card miles that you earned. This is because the $800 flight was not paid for.
This holds true whether you use rewards to cover all or just a portion of an expense. You could only write off the $300 you spent out of pocket for a business trip, such as a $800 ticket, provided you paid the remaining $300 in cash and the remaining $500 with incentives.
When to use points or miles for travel for work
Charge only business-related items on your credit card if you are explicitly using one for that purpose. You can use your credit card rewards for both personal and business travel, though, as they are not subject to taxation.
Redeeming airline miles for a business stay may be advantageous if you accumulate enough of them to pay for a ticket entirely with miles or for multiple hotel stays. This is especially true if you frequently travel for work. Redeeming your points for business travel has a lot of benefits.
Which points or miles should I use for personal travel?
There’s a strong case to be made for reserving points and miles only for personal travel. By using this method, you can preserve your rewards for leisure rather than work and take advantage of the benefit of immediately deducting business expenses. Keeping track of what you write off as business expenses and what was spent for personal purposes is all that’s required if you use your personal credit card for both personal and business purposes.
In summary
Although the rewards from your company credit card are not taxable, how you use them may have tax ramifications. You will not be allowed to deduct business expenditures as purchases if you pay for them using rewards points or miles because you did not really make the transaction.
Paying for business expenses using a credit card to accrue rewards is one method for small business owners to have their cake and eat it too. The credits can then be applied to personal expenses and vacation. In this manner, you can continue to deduct these business expenses from your taxes. You may relax knowing that you won’t be taxed for obtaining credit card rewards, regardless of how you decide to use them.