Are your business credit card rewards taxable?

When Are Business Credit Card Rewards Taxable?

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Credit card rewards generally aren't taxable, but there are exceptions.

The tax treatment for rewards earned using business credit cards is similar to the rules for consumer cards. And many business credit cards come with generous rewards and sign-up bonuses.

The only time that credit card rewards are taxable is when you do nothing in exchange for the reward, i.e., you get 60,000 miles for signing up for a credit card with no minimum spending.

On February 23, 2021, the U.S. Tax Court in Anikeev v. Commissioner T.C. Memo. 2021-23 partially upheld an IRS tax assessment on a taxpayer's credit card rewards. Credit card reward programs have gained popularity over the years. Cardholders make purchases with their credit card and receive a percentage in "rewards" in return based on the credit card company's rewards program. Rewards come in various forms, including statement credits, cashback, airline miles, and travel redemptions.

IRS policy has historically been that a purchase incentive such as credit card rewards are not treated as income but as a reduction of the purchase price of what is purchased with the rewards or points. In 2017, the IRS issued a notice of deficiency for tax years 2013 and 2014, asserting that the taxpayers had failed to include in income the $310,000 of rewards earned adequately.

During tax years 2013 and 2014, the taxpayers at the center of the case had used their credit cards to purchase approximately $6.4 million in Visa gift cards, reloadable debit cards, and money orders. The taxpayers would primarily purchase Visa gift cards on their credit cards and then purchase money orders with the Visa gift cards. The money orders would then be deposited into the taxpayer's bank account. The purchases had earned the taxpayers approximately $310,000 in credit card rewards.

Key Rulings

  • The Tax Court noted that had the taxpayers not been so successful at generating credit card rewards, the IRS likely would not have assessed additional tax.
  • The Tax Court partially sided with the IRS in its argument that rewards from the use of credit cards to purchase money orders and reloadable debit cards directly are includible in income, given that the money orders were eligible for deposit into the taxpayer's bank account and reloadable debit cards are similar to cash.
  • The Tax Court overruled the IRS's position of taxing rewards earned on the purchase of gift cards since they were not redeemable for cash and merely provided a service in the form of a plastic card.

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Miguel A. Palma, CPA, PFS, CGMA

Founder of Palma Financial Services, Inc.
miguel@palmafinancial.com

Palma Financial Services, Inc. ("PFS")has helped small business owners minimize income taxes and build wealth since 1998.

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