Are credit card rewards, points, and cashback taxable? When it comes time to file your taxes, many credit card users often wonder about the points, rewards, or cashback they have earned on their credit cards. Is this taxable to the government? What complicates this matter even more is that businesses also use credit cards. So this issue can be divided into personal and business credit card use.
Are Personal Credit Card Points, Rewards, and Cashback Considered Taxable Personal Income?
In most situations, most points, rewards, or cashback could be considered a discount on interest, and probably not taxable. In fact, the IRS did publish a publication here in 2002, which discussed the frequent flier miles (which basically said you don’t need to include it). In addition, I did find at least one tax advising company (Ernst and Young), which had published this in 2007:
The IRS realistically views rebates as another way of offering a price reduction to induce you to buy a product. Similarly, the dividends that a life insurance company pays you are a reduction of your premium rather than an addition to your gross income. The same rule applies to any cash rebates you might receive from your credit card company for using its card.
However, in some cases, cardholders may actually PROFIT by using credit card rewards, and not using any interest. In this case it is a bit more sticky. I would say that in the situation where you are making profit and don’t pay interest (by paying of your balance in full each month), this would be considered income. I would report it to be safe. On the flip side, at the time I am writing this article (2010), it may not be necessary to include the rewards if they are small and are covered by your interest or credit card fee expenses (but always check with a tax professional to be sure), but to be safe, I personally do it.
I would always consult a tax professional, or a local IRS authority (or email them) to find out each tax year if anything has changed, and if it is required to report any credit card rewards (especially if you earned a small profit). You know the IRS, they expect the dime you found on the ground to be included in income =).
As far as me personally, I do include a little bit extra in my income taxes to account for additional revenue I have earned on various things (such as credit card rewards, stuff I may have profited from on eBay, etc.). So I do go ahead and include this amount “just in case” because it usually has ZERO or very little effect on my taxes, and yet it gives me peace of mind.
Should Businesses Report Credit Card Rewards, Points, and Cashback as Income
In this situation, I would say it is a lot more clear-cut to say, YES, you need to report and account for any compensation you received. This is even more important than personal taxes because in a business you need to account for every revenue and every expense. So even if you did deduct interest expense, and considered the points as a discount in that interest expense, then so be it. You could either hypothetically include it as a reduction in interest expense, or just flat out call it income. That is up to you and your tax advisor. But I feel that for business credit cards it is absolutely necessary to account for it for sure.
In my own business taxes, I reported the cashback I received as simply, “credit card rewards income.” I did this because I didn’t want to have to keep track of how much it deducted from interest charges (I know, I am lazy). How you account for it is up to you, but always consult a tax professional to see if you need to report it, and so forth. Remember, tax rules change yearly in most cases (sometimes sooner), so always check each time you file your taxes to see if anything has changed.