Posted in Business & Corporate Law
Business credit cards have many benefits and are great for keeping business and personal expenses separate. Also, most of them come with benefits such as cash back, gift cards, consumer protections, or travel rewards based on your spending. Fortunately, these rewards are generally considered rebates and are not income for IRS tax purposes.
Keep in mind that if you pay business expenses with credit card rewards, then you would not be able to take a deduction on that particular expense. This is true if you pay partially with a reward. You would only be able to deduct the amount that you actually paid as a business expense. For example, if an item costs $100 but you only spend $99 because there is a $1 reward, you can only deduct $99. As such, it may be wise to use your rewards for “fun” instead of work so you can get the full benefit of deducting business expenses as they occur. In other words, while the credit card rewards are not taxable, they do have tax implications depending on how the rewards are used. The best strategy may be not to pay for business expenses with reward points or miles (because you will not be able to deduct the full expense) but rather use the rewards for personal travel and spending.
Be aware that there is a difference between awards and rewards. As stated above, rewards are not considered taxable income. However, you may be required to pay taxes on awards where you do not have to spend money to earn it. For example, if you earn a cash bonus for opening a new checking or savings account, that’s a taxable event because you did not spend money to earn it. The financial institution would send you a Form 1099-INT at the end of the calendar year. It’s important to review that tax form and report your taxes accordingly, assuming the reporting to you is accurate.
In summary, if tax planning is important, look for business credit cards that yield rewards (and not awards) such as travel miles, cash back, hotel or airline rewards. Further, consider using flexible credit card rewards for personal use. Regardless, you can rest easy that you won’t be taxed for earning rewards.