Opening a New Account
An enticement credit card companies often use to obtain new customers is offering an initial bonus when the customer opens a new account. These bonuses typically are tied to minimum spending requirements or similar types of required activities. For example, a credit card company requires the customer to charge $1,500 in purchases on the card within the first three months in order to receive a sign-up bonus of 25,000 airline miles. These types of arrangements generally are considered a rebate as opposed to income to the recipient. Rebates are generally not taxable to individuals, so the 25,000 airline miles would not be taxable to the credit card holder.
Everyday Use of Card
In addition to the initial account bonus, credit cards may offer an incentive based on the amount of purchases made on the card each month. An example of such an arrangement is earning one airline mile for each dollar spent. These types of incentives typically are considered a reduction in the price of the item, as opposed to income to the credit card holder. For individuals, there are really no further tax considerations to these types of purchases; however, if the item purchased is for a business, there may be tax considerations. Because this type of reward scenario is considered a rebate as opposed to income, the value of the reward should be factored into the cost basis of the item purchased. An example of this is if a business buys a $500 machine on a credit card that offers 2% cash back on all purchases. The initial cost of the machine is $500; however, the business receives a 2% rebate, or reduction, which equals $10 from the credit card company. The cost basis of the machine should be reported as $490 when determining the deduction on the business’s tax return.
Use of Personal Rewards Card for Business Travel
In 2002, the IRS issued Announcement 2002-18, Frequent Flyer Miles Attributable to Business or Official Travel, which addressed the issue of personal use of frequent flyer miles or other promotional items that were received as a result of business travel. The IRS stated at the time that it would not pursue a tax enforcement program with respect to frequent flyer miles and other promotional benefits. No further official guidance has been released to address these issues. So what does this mean? Currently, the IRS will not assert that a taxpayer has understated his/her income by not reporting the value of frequent flyer miles or promotional benefits earned for their personal benefit while traveling for business purposes.
Credit card rewards have become more prevalent in the past decade. If you own or operate a business that has employees who regularly travel or submit expense reimbursements for charges on their personal credit card, consider implementing a policy that addresses the use of rewards credit cards. This policy could address whether the use of rewards cards are allowed and whether employer-provided credit cards are required for purchases, as opposed to use of personal credit cards.
Credit card rewards can be a great way to accumulate airline miles and other benefits. As they have become more commonplace, issues surrounding employer/employee expectations, as well as tax issues, should be considered. In most instances, credit card rewards are not currently reportable in taxable income; however, the IRS could issue new guidance that changes this current stance.
James “Nick” Browning, CPA, is a manager in Lindquist LLP's Portland office. He has seven years of experience with audit, accounting and tax services, including four years of specialized experience with audits of not-for-profit organizations and their related employee benefit funds. He is a member of the American Institute of Certified Public Accountants and the International Foundation of Employee Benefit Plans.