by Dan Caplinger | March 12, 2019
Find out if the miles and cash back you get from using your card to pay for business expenses have unintended tax consequences.
Many people use credit cards to pay for personal expenses, and many credit card companies offer rewards to their customers for making purchases on their particular cards. With special business credit cards, many employers give key employees the ability to make business purchases directly -- and those cards sometimes offer the same types of cash, airline miles, and other incentives to the employees who use them.
Most employees who have access to business credit cards consider the rewards that they earn to be a fringe benefit of their work. Yet tax policy specialists might argue that if you get something of value from your business credit card as a direct result of your employment, then it's essentially part of your compensation -- and therefore potentially inclusive in your taxable income along with your ordinary wage and salary income. Below we'll look at some of the rules that the IRS and others have considered in determining whether business credit card rewards are in fact taxable.
Before turning to the business context, one important question is whether credit card rewards in general are considered to be taxable income. Fortunately for cardholders, the usual answer is no.
The logic that the IRS uses here is the same as gets used when you buy things using coupons or other discount offers. When a credit card offers cash back to you in exchange for making a purchase, it's essentially reducing the purchase price of the thing you're buying. So if you have a standard 1% cash-back card and pay $100 for an item, you'll get cash back of $1 on that transaction. Rather than taxing you on the $1 in cash you get back, you're instead treated as if you had paid a net amount of $99 for the item you purchased.
The case above addresses situations in which you earned a reward for making a purchase. However, more controversial is the situation in which you get a reward simply for signing up for a card. For instance, if you get a $100 sign-up bonus for opening a credit card account, there's nothing that you've necessarily had to buy to which you could apply the $100 as a discount. In those cases, some card issuers actually report the bonus as income on a 1099, and in that case, the IRS will see a red flag if you don't include it on your tax return.
For business credit cards, the tax rules are different because of the nature of the expenses. Business expenses are generally tax deductible by the owner of the business, and that changes the impact that a card reward has. Just as the IRS treats the reward as a discount for personal purposes, it also sees the reward as a discount for business purposes. But in that case, that's not the best answer for the employer, because the reward effectively reduces the net amount you spend on the deductible item. So in the case above, if you spent $100 on a tax-deductible business expense and got $1 back in cash rewards, the IRS would want you to account for the $1 and take a deduction only for the net amount spent of $99.
What gets even more complicated is when the employee with the business credit card isn't the business owner. If the expenses get charged directly to the business and the cardholder has no liability, then the cardholder wouldn't be the one to get the rewards anyway, so there wouldn't be any tax consequences to the cardholder at all. However, if the business card is in your name and you have shared liability, then those rewards are still yours.
So far the IRS has been lenient on many rewards that employees earn in the course of their work. For instance, flying for business but getting to keep frequent flier miles hasn't created a taxable event in the IRS' eyes. Card points have gotten treated the same way. There's a possibility that cash payments might get treated differently, but this hasn't gotten a lot of attention from tax authorities in recent years.
Despite the lack of authoritative guidance from the IRS on the question, taking a position that business credit card rewards don't create taxable income appears to be justified by past practice. However, the most important thing to beware of is if you get a tax form from a credit card issuer that purports to include taxable income that you're responsible for reporting.
The reason why a tax form can be such a problem is that it indicates to the IRS that your card company believes that the payment it's made to you is worthy of notice. If you simply ignore it, then you could trigger an audit when the IRS compares your return with the information it has from third parties.
It is smarter to accept that the income has been reported but to state specifically if you have a position that's contrary to what your credit card company's tax reporting form has stated. You'll want to talk with your accountant to make sure that you do whatever it takes to protect your rights while also avoiding the potential for any onerous penalties, but there are ways to argue against having to pay tax in this situation.
In general, credit card rewards won't have big tax consequences, and in the business context, the only impact it'll have is to reduce slightly the tax deductions you'll be able to take on business expenses that you can usually write off. For non-business owners, most reward perks from employee activity have largely escaped the IRS radar. For an absolutely certain position, though, you'll have to consult with a tax attorney or accountant.
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