Are credit card rewards and online cash-back rewards taxable?
Disregarding business cards specifically, the answer is that generally rewards and miles awarded based on credit card purchases are not taxable. The most common reward offer is a percentage back on purchases, often 1% to 3% for reward cards. The IRS just considers the reward as a discount on the purchase, so a $100 purchase with a 2% card reward would mean a net $98 purchase.
When it comes to business credit cards, things are a bit stickier. That 2% reward example when the card is used for a deductible business expense is the issue. While many business owners simply take the $100 deduction as their expense, the IRS considers that 2% reward as a discount and expects you to account for it with a $98 expense entry.
This is a difficult enforcement dilemma, and for many small business owners, it may not ever be noticed or cause a problem. When you should be concerned and take action is if you receive a form from your card issuer that shows they’re reporting your aggregate business card discount amount as income. Now the IRS has something to compare to your return, so be aware.
When you’re getting online cash-back rewards for buying through services like eBates, the rules can be the same for a business. Suppose you’re using a business card and buying all your business supplies online. The discounts can be anywhere from 1% to 8% as shared by the online service. The IRS would normally consider this accumulated discounts, and you would be expected to adjust your expense deductions to account for it.