How the IRS interprets taxing rebates, points, and rewards can be confusing, at best. For example, your credit card rewards may be taxable income. Sometimes, however, the IRS considers these rewards as a discount, not as income.
Taxing rebates, points, and rewards
Keep in mind that these can come from different sources. Your bank or credit card can offer them, or the vehicle you just purchased may come with rebate “kickback” to you.
Tip: That $5,000 rebate you received on your new pickup truck may be subject to sales tax. Most states view cash rebates as a form of payment from the manufacturer that doesn’t affect the purchase price of the vehicle. Always check out fees and sales tax at the time of purchase, but check this out.
You may also earn points, rewards, or rebates with airline bookings or when you book a hotel stay. If you’re receiving these in return for spending money, chances are you won’t get hit with taxes.
Rewards aren’t always income. Generally, any reward you receive that requires a financial transaction is not taxable as income. The IRS views these as post-purchase discounts. They are not always cash-back programs and can include travel mile bonuses and accumulated points toward future purchases. Generally, when you spend money to get something, it’s tax-free.
In 2017, American Express, Capital One, and Discover gave out a combined $12.9 billion in rewards! When that much money changes hands, the IRS pays attention.
Some rewards, however, are taxable income. How so? If you receive a credit card sign-up bonus that doesn’t require you to do anything else, that’s taxable income. These rewards also include non-monetary rewards. In other words, anything ‘rewarded’ without your being required to use the card, usually is taxable. These rewards can consist of airline miles, gifts that are tangible goods, or other valuable rewards.
- If you’re making a transaction involving rebates, points, rewards, etc., make sure you understand the meaning of these catch-phrases and tax implications.
- “Check with your tax professional” is a caution found in professional articles and would be especially true if you are close to hitting a higher tax bracket.
Mixed up in this group can also be the referral bonus (reward) the bank adds to your account for referring a friend. Same with bonus (also a reward) you receive for maintaining a certain balance in your account. Both are taxable by the IRS similar to taxable interest income or gift income, rather than a rebate or discount. Depending on how the institution categorizes the bonus, you could receive a 1099-MISC or a 1099-INT. Remember, the IRS gets a copy, too.
Credit card companies throw some sly references around. There are reward points and loyalty points that aren’t usually taxable. But the more confusing credit card points and the sign-up bonus need watching when you switch or open a new account. Expect to receive a 1099-MISC tax form if you aren’t required to make a purchase.
Even though a credit card reward might be called a sign-up bonus, you typically don’t get reward points or miles just for signing up. Instead, you must meet a certain level of spending before the promised miles or points are actually put into the account.
Where spending is required before points are awarded, the bonus becomes a nontaxable rebate. Read the fine print before you opt for a new credit card or bank account. Don’t get caught in a reward points tax trap.
Generally speaking, the IRS considers transaction-related points or rewards as rebates, and not as taxable income. Think of the rebate as a discount you’ll receive on your purchase later. Here’s what the IRS has to say:
“Taxpayers will make purchases with the credit cards, and as a result of those purchases, will be entitled to receive rebates…. The portion of the credit card purchases that taxpayers can…receive back in cash…does not constitute gross income to taxpayers.”
Business or personal, does it matter?
You can be darn sure that with its “zillion-page tax code,” the IRS has decided it does matter. As a business owner, you can rack up a lot of rebates, points, and rewards when you use your credit card. Remember all those client dinners, air travel, and the update on your computer system, hardware, and software? Those “earnings” are probably not taxable.
But, the IRS wants their piece of the action, so what’s the flip side when you benefit from those non-taxed rebates, points, and rewards?
- As a business owner, you claim every eligible business expense you can grab. But, when you receive rewards points or cash back refunds, you lower your tax deductions and indirectly increase your tax bill. Technically, that means when filing your business tax return, you must figure the dollar value you received and subtract it from the amount you would have deducted.
- The TCJA of 2017 also gave business owners a great tool with Section 179. Better pay attention to allowable vehicle Section 179 deductions and that big rebate from the manufacturer.
- As a business owner or an individual, when you earn rewards, cashback, or miles without having to spend anything in return, you received taxable income.
Anything else about taxing rebates, points, and rewards?
Sure. Nobody likes surprises. Unexpected and ignored 1099s raise and wave red flags. That gigantic 4-wheel drive pickup you just bought packed a big rebate and came with unexpected sales tax. And whoever would have thought they were so close to the next tax bracket that something so trivial as bank referral bonuses would bounce them up there?
As a business owner and taxpayer, you have a lot of stuff to pay attention to.
The bottom line
If you want the control you need and want, as your CPA financial and tax specialist, I help you manage and control your overall financial life goals. It’s that simple.
I earned my reputation as The Radical CPA
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