Are business credit card rewards taxable? IRS rules explained

Are business credit card rewards taxable income? 

In most cases, business credit card rewards you earn through spending don’t count as taxable income. Instead, the IRS usually treats these types of rewards as rebates that reduce the cost of what you bought. A rebate lowers your purchase price rather than adding income to your business. 

The key distinction comes down to if earning the reward requires any spending. 

• Rewards you earn from purchases usually stay non-taxable.
• Rewards you earn without spending may count as taxable income or business revenue.

It’s important to understand the difference between these types of rewards. A bonus for opening a new business bank account without a spending requirement isn’t a rebate according to the IRS. As a result, it may be taxable. Knowing the difference can help you avoid reporting errors when tax season comes around. 

What is the IRS rebate rule?

The IRS rebate rule explains why most credit card rewards can stay non-taxable. According to IRS Publication 525, rebates and purchase incentives reduce the cost of an item instead of creating income. So you lower the recorded cost of what you bought rather than counting the reward as taxable income. In a 2002 IRS announcement, the agency indicated that credit card rewards tied to spending follow this same principle. 

Here’s a simple example:

• You spend $5,000 on business supplies. 
• Your business rewards credit card earns 2% cash back. 
• You receive $100 in rewards. 

When you redeem your rewards, the IRS views the initial transaction as spending $4,900, not earning $100 income. Your cost basis drops, or put simply, you record the purchase price as a lower amount for tax purposes and no taxable income occurs. 

When are business credit card rewards taxable?

Most business credit card rewards you earn stay non-taxable. However, a few may fall outside of the rebate rule. The difference usually comes down to whether you had to spend money to earn the reward.  

Sign-up bonuses and tax obligations

Sign-up bonuses that are tied to a spending requirement usually aren’t taxable. The IRS typically treats those types of welcome bonuses for new cardholders like rebates on purchases you already made. 

A bonus may become taxable when there’s no spending requirement or when the card issuer pays out guaranteed cash or interest. In those situations, the rewards start to look more like income than a discount. When that happens, the card issuer may report the value of the rewards on your 1099, and the IRS will expect you to include it on your return.

Referral bonuses and other taxable rewards

Some card issuers offer referral bonuses when you recommend a card to another business owner and that person opens an account. These bonuses often count as taxable income because they don’t require spending. 

Other rewards that may create taxable income include: 

• Promotional cash incentives with no purchase requirement.
• Interest earned on associated deposit accounts or reward balances (if applicable)
• Account opening bonuses.

Also, it’s important to understand that if you receive a 1099 for rewards, the IRS already received a copy. You must report the income even if you disagree with the classification. A tax professional can help you determine whether the amount is correct or if you have grounds to dispute it.

How are different types of rewards taxed? 

Business credit card rewards come in several different forms. However, the tax treatment of these rewards usually follows the same rebate rule. 

Cash-back rewards

Cash back earned from spending typically isn’t taxable. The IRS treats it as a rebate that lowers the cost of your purchases. 

If you redeem cash back as a statement credit or deposit it into your business bank account, the tax treatment doesn’t change. The reward still reduces your expenses rather than creating income or revenue. 

Travel points and miles

Points and miles you earn through spending are also not taxable. Even though their value doesn't show up until you redeem them for travel, in general the IRS still treats these rewards like rebates tied to past purchases.  

A first-class flight you book with points can create meaningful savings. But it typically doesn’t create taxable income on its own.

Statement credits and gift cards

As a business credit card rewards card holder, you may be able to redeem points you earn as statement credits or gift cards. These types of cash-equivalent rewards typically aren’t taxable. They work the same way as cash back by reducing the amount you ultimately pay. 

However, gift cards or credits you earn without spending may be an exception to this rule. (Example: “Refer a friend and receive a $50 gift card.”) These types of rewards may be taxable, especially if the issuer reports them on a 1099.

How to use business credit card rewards for business expenses

When you redeem business credit card rewards wisely, they have the potential to save your business real money. But how you use your rewards matters for tax purposes.

Can I use business credit card rewards for personal use? 

Using business credit card rewards for personal travel or purchases usually doesn’t create a tax issue on its own. The IRS generally doesn’t treat rewards you earn from business spending as taxable income, even when you redeem them for personal use.

That said, personal use of business rewards can complicate your records. Rewards you convert to cash, treat like compensation, or use in a way that could look like tax avoidance may fall under different rules. Mixing personal and business use can also make it harder to track expenses and back up deductions later.

Can I deduct business expenses paid for with rewards? 

It’s important to understand that you generally cannot deduct the portion of business expenses you pay for using credit card rewards. This is a critical rule that many business owners miss.

If you use points, miles, or cash back to cover a business expense, the IRS treats the cost as already reduced. Only the portion of the expense you paid with cash or credit qualifies as a deductible business expense.

For example, if a $1,000 business flight costs you $600 after applying rewards, you can only deduct $600. The rewards reduced what your business actually paid, so writing off the full $1,000 would overstate the expense.

Tax reporting requirements for business credit card rewards

Most business owners won’t receive tax forms for rewards they earn through spending. Card issuers don’t issue 1099s for cash back, points, or miles tied to purchases because the IRS treats those as rebates.

Tax forms usually only come into play when rewards aren’t associated with spending. If you earn $600 or more in taxable bonuses in a year, like cash bonuses or referral incentives, the issuer may report them on Form 1099-MISC. Reporting thresholds and IRS requirements can change, so confirm current rules with a tax professional.

If a 1099 shows up in your inbox or mailbox, don’t ignore it. The IRS already has a copy and you should review the form carefully and consult a tax professional about how to report it properly. Even without a form, taxable rewards still count. If something doesn’t look right, a trustworthy tax professional can help you sort the situation out.

What are the types of business credit card rewards?

Most business rewards credit cards come in one of a handful of common structures. While the rewards and benefits may work a bit differently, the tax treatment is usually the same when you earn rewards through spending. 

• Cash-back rewards return a percentage of your business spending, often as a statement credit or deposit to your business bank account. When you earn cash rewards through purchases, the IRS treats cash back as a non-taxable rebate. 
• Points-based rewards are popular because you can typically redeem for travel, cash back, gift cards, or statement credits, depending on the rewards program. Points you earn from spending typically count as non-taxable rebates.
• Miles-based rewards usually focus on airline travel and travel-related expenses. Like other spending-based rewards, the miles you earn from purchases generally aren’t taxable. 
• Statement credit rewards apply directly to your account balance and reduce the amount you owe your credit card issuer. When tied to spending, these credits usually fall under the IRS rebate rule as non-taxable income. 

Choosing the right business rewards credit card for your business comes down to several factors. However, it’s usually details like how your business spends money, your business credit profile, and how you plan to use the rewards you earn that matter most when you’re shopping for the right business credit card, not tax differences. 

The bottom line

Most business credit card rewards aren’t taxable because the IRS treats them as rebates that reduce purchase costs. Tax issues usually only come up when rewards don’t require spending or when businesses deduct expenses that they already covered with rewards.

Credit card rewards can be valuable and have the potential to save your business money. Still, it’s important to track your reward usage carefully, watch for 1099 forms, and keep clean records. With a little extra effort now, you could save yourself from potential headaches down the road.

This article is for informational purposes only and does not constitute tax advice. Tax laws change and individual circumstances vary. Consult a qualified tax professional regarding your specific situation.

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