Nonprofit Accounting Basics
Taxability of Credit Card Cashback Rewards
Most credit card companies offer some form of reward program to market their card and build customer loyalty. Rewards come in a variety of forms including cash-back bonuses, gift cards or other merchandise, or airline frequent flier miles.
The Internal Revenue Service (IRS) has fairly clear guidelines about the taxability of reward programs as they pertain to personal use of credit cards. Rewards earned by making credit card purchases are considered by the IRS to be a form of rebate or a reduction in the price of the purchases made with the credit card. That’s great news for those saving their frequent flier miles for that family vacation, the new computer or gift card. These types of earned rewards are not taxable.
However, there are some situations where the IRS could view cash-back rewards, gift cards and merchandise reward programs as taxable income. Some banks and credit cards offer reward miles or points as an incentive or “sign-up bonus” for opening an account. If making a purchase is not required in order to use the points, then the points are generally considered to be taxable income. The point value is determined by the credit card company and should be contained somewhere in the fine print of the reward literature. If the value of those points exceeds $600, then the credit card company would be required to report that income to the IRS and will send those customers 1099-MISC forms.
If an employee uses his personal credit card to for a business related purchase and is subsequently reimbursed for that purchase by his employer, the IRS could consider the related cash-back reward to be taxable income. Likewise, if a business receives cash-back rewards or gift cards, then it should reduce the business deduction of the items purchased with the rewards credit card. If the rewards are earned by an employee of the business through the use of a corporate credit card, then the IRS would consider the value of the cash or gift cards to be taxable income to the employee.
In these situations, the employee should track the amount of gift cards and cash that they received during the year and report that amount on Line 21 of Form 1040 as other income.