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:
- And Cash Back
Types of Credit Card Rewards
- 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.
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.
|Earned Cash Back (Expense/Revenue)*
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):
|Credit Card Liability
|Earned Cash Back (Expense/Revenue)
Recording the redeemed cash-back rewards, for rewards that were recorded when earned:
|Redeemed cash back
|Credit Card Liability
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.
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.
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.