Should Businesses using Credit Card Rewards be Recorded for Accounting and Tax Purposes
Many companies will take advantage of credit card rewards programs to keep employee spending costs in line and improve the bottom line. But some organizations are confused about whether they need to account for credit card rewards and if using them will have any accounting or tax ramifications. A recent Forbes article, written about this topic, states that those rolling in points and miles, might ask: What exactly counts as income? For example, do you have to report cash back earned from a credit card? What about frequent flyer miles or bank rewards points?
The bottom line is credit card terms and rewards programs vary from different financial institutions so it’s a wise idea to review the fine print closely and consult with a CPA when making decisions for your company.
First, you should take a look at what type of rewards your company’s business credits have. When you signup and are approved for a card, there are generally 2 kinds of rewards:
- Points
- And Cash Back
Types of Credit Card Rewards
Although there are dozens of types of credit card rewards ranging from airline miles to cash back to transferrable points, from a taxation standpoint all rewards fall into two categories:
- Rewards that are treated as rebates on spending
- Rewards that are treated as income in exchange for performing a service
From a redemption perspective, you may treat both types equally. However, the IRS treats these two categories differently. You will not be required to pay tax on the cash value of rewards that were considered rebates.
However, rewards that are considered income will be treated the same as any of your other income and will be taxed similarly to more traditional income, like wages you earn at a job.
Cash-Back Rewards
Let’s first take a look at “cash-back rewards” which according to an article published by Marcum LLP are said to be simpler to account for compared to “points rewards” because they have a dollar value and the amount earned is simplified. It’s easy to understand how it works: they are earned based on the level of spending on the card.
The Marcum LLP article points out that “the terms of your credit card cash-back rewards and materiality will determine if you should accrue for the rewards earned or wait and account for them when they are redeemed.”
Many companies do not always record unclaimed cash back or rewards on their balance sheet or statement of financial position until they are redeemed. While some organizations may claim them at the end of the reporting period in a lump sum for the total rewards earned during the reporting period. In many instances, it doesn’t make much sense to account for amounts earned on each credit card purchase.
The Marcum LLP article also mentions that some credit card companies even demand a waiting period or spending minimum threshold before the cash-back rewards can be redeemed. So what happens is that most companies will usually record the cash-back rewards when they redeem them in a lump sum. See the table below.
| Account | Description | Debit | Credit |
|---|---|---|---|
| Cash | Redeemed cashback | $XXX | |
| Earned Cash Back (Expense/Revenue)* | $XXX |
Some businesses choose to record the earned cash back as revenue; while others like to record it as a contra (negative balance) expense account. Treating it as a contra expense allows management to see the net reporting period expense incurred. Either approach results in the same net impact on the bottom line.
When it comes to accounting considerations related to this it’s best to examine how material the rewards are to the company’s overall financial statements in determining how to record them. When it comes to determining the materiality, Auditing Standards (SAS) No. 138 notes that “Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.”
On a graduated scale going from material to not material, if rewards earned during the reporting period are individually or in aggregate material to the overall financials, then:
- You might want to consider tracking and recording rewards earned on each purchase
- Or, at a minimum, you should track and record the lump sum earned at the end of each reporting period
There if individually or in aggregate, these transactions are not material, then your company may decide it is more practical to record cash-back rewards when redeemed.
If the business records the credit card rewards earned for each purchase or in a lump sum at the end of each reporting period, the entries would like some like:
Recording the earned cash-back reward (either by transaction or in a lump sum at end of the reporting period):
| Account | Description | Debit | Credit |
|---|---|---|---|
| Credit Card Liability | Earned cashback | $XXX | |
| Earned Cash Back (Expense/Revenue) | $XXX |
Recording the redeemed cash-back rewards, for rewards that were recorded when earned:
| Account | Description | Debit | Credit |
|---|---|---|---|
| Cash | Redeemed cash back | $XXX | |
| Credit Card Liability | $XXX |
Points
Valuing credit card points earned is more complex and you must closely review the terms of your credit card points agreement. Issuers can use varying multipliers for different types of credit card purchases. Each type of purchase could have a different value and these values may fluctuate.
Sign-On Bonuses
Bonuses for signing on to a credit card company’s card program would be recorded as other income when the agreement is signed. Determining if these sign-on bonuses are taxable depends on if they are tied to spending. If you receive a sign-on bonus without having to meet any spending requirements, then it is considered taxable income. If the sign-on bonus requires a level of spending within a certain period, then it is not taxable income. Most credit cards do have some type of spending requirement to earn the sign-on bonus, making it non-taxable.
Taxability Of Rewards
In most circumstances, business credit card rewards earned are not considered income, which means they are not taxable. Instead, credit card rewards are considered rebates on items you purchased with a credit card. However, the IRS may consider some rewards programs taxable income.
Meaning there’s no need to pay taxes on miles, points or cash back earned from a credit card—regardless of whether it’s a bonus for opening a new account or rewards for everyday spending. That’s because purchases must be made to earn those rewards and as a result, the IRS considers them a rebate or a discount rather than income. Just like we don’t have to pay taxes on the value of a coupon, we don’t have to pay taxes on rewards we earn in exchange for buying something.
If you are not required to make a purchase to use the points earned, then the points are generally considered taxable income. If the value of points earned exceeds $600 during the year, then the credit card company would be required to report that income to the IRS and send the customer a 1099-MISC form. Occasionally, you may not receive a 1099-MISC form for taxable bonuses if you earned less than $600 in value. Even if this happens, you are still required to report the income and pay taxes on the appropriate amount.
The IRS treats cash-back rewards as a rebate on spending, not as income — so you are not required to pay income tax on the rewards. If a business receives cash-back rewards or gift cards, then it should reduce the business deduction of the items purchased with the rewards credit card.
If employees are using and earning credit card rewards and gift cards from corporate credit card purchases and receiving those reward benefits, then the value of the cash or gift cards they receive would be considered taxable income to the employee.
Employees should track the amount of the rewards they receive during the tax year and report them on Line 21 of the Form 1040 as other income.
However, there can be tax implications depending on how you use your rewards:
- If you pay for business expenses with rewards points or miles, you can’t deduct those expenses as business purchases
- If you redeem rewards from a card that doesn’t have a spending threshold, you might be required to report those rewards as income when you file your taxes
- If the credit card company issues a Form 1099 on the rewards, the rewards must be treated as a payout and reported as income
- You can account for credit card rewards by recording them in the “Other Income” or “Credit Card Credit” sections of accounting software such as QuickBooks
Conclusion
Credit card rewards can be a useful employee spending tool for organizations to manage costs, but the accounting and tax implications can be a little confusing. Cash-back rewards can be recorded when earned or redeemed, depending on materiality. Valuing points is intricate due to varying multipliers.
Sign-on bonuses may be taxable based on spending requirements. Business credit card rewards are generally not taxable, but some programs may be. Companies should review terms, consult a CPA, and consider tax rules for employee rewards. Understanding these implications can help make sure that accounting and compliance are done properly. If you have questions feel free to reach out for a free consultation.
