Disclaimer: This article is for informational purposes only and not for the purpose of providing tax or legal advice. The content should not be relied upon for making tax or legal decisions.

Are Rewards Considered Income?

Typically, the IRS treats credit card rewards as a rebate on spend, rather than taxable income. For personal transactions this means very little, since you are generally not selling items that you own for a profit outside of a business scenario, so the basis being reduced by a few percentage points makes no difference.

For business expenses where you are potentially deducting the expenses that you earned the rewards for, this can be a more nuanced question, as we will discuss below.

When are Points Taxable?

Points and other rewards are generally taxable when there is no spend requirement to earn the points. Examples include referral bonuses, points issued for opening a deposit account, and in circumstances where you buy a direct cash equivalent with a credit card, such as a reloadable debit card or a money order Anikeev v. Comm’r, T.C. Memo. 2021-23 (U.S.T.C. Feb. 23, 2021)

Typically, when you have points that are taxable from a referral or a new account, you will receive a 1099 that will have a stated value of the points, which will generally be around 1 cent per point, so you won’t need to figure out how much income to report.

Impact on Business Expenses

When you make a purchase of a business expense, you may earn rewards. Based on the IRS guidelines, it appears that reducing the basis by the amount of rewards earned could be the correct approach, however, there are a few issues with that:

• The rewards are legally the property of the bank, and can be taken or cancelled at their discretion,
• The points have no fixed value, and most points can be used for multiple types of redemptions that have widely variable cash values, and
• Tracking rewards earnings would be impractical, especially when some programs automatically combine points across all cards.

What This Means

Since the points remain the property of the bank and don’t have a fixed value, it would be unreasonable to try to figure out what the points are worth in order to reduce the deductible amounts of expenses. The complexity only gets worse when you use multiple cards that may have different points currencies, different earning rates, and also the added complexity of intro bonuses.

Just for fun, let’s also remember that American Express combines all Membership Rewards points into one pool instead of attaching them to the card that they were earned with. Let’s say that someone has the Blue Business Plus, the Business Gold, and the personal Platinum. Out of the spend on business cards, we have some spend that is 4x, some that is 2x, and some that may be 1x. All of those points are in the same pot and mixed with points from the personal card. To figure out whether each transaction on the Gold earned 1x or 4x is impractical, especially since the 4x categories can change monthly based on your top spend categories in that particular example.

I would feel comfortable arguing for a client that the points haven’t provided a benefit until they are redeemed, and then it depends on how they are used. If they are used for personal expenses, they would have no tax impact. If points are redeemed for a business trip or as a statement credit for business expenses, then they would reduce deductible expenses. This is one of the main reasons that I recommend clients pay for business travel and save points for leisure travel.