Tax Implications of Credit Card Cash Back
For many, earning cash back rewards is a simple and tax-free way to benefit from credit card spending. For the most part, this is true: the IRS generally considers cash back earned on purchases to be a rebate or discount, not taxable income. However, the rules aren't always so clear-cut, especially when it comes to sign-up bonuses, referral rewards, and business expenses. This guide will provide a detailed and helpful overview of when your credit card rewards might be taxable and how to handle these situations.
For a broader overview of cash back rewards, explore our hub article on The Ultimate Guide to Cash Back Credit Cards.
When cash back is not taxable
In most cases, you don't need to report the cash back you earn on your tax return. This applies to both flat-rate and bonus category rewards.When cash back may be taxable
There are specific situations where cash back can be considered taxable income. This generally occurs when you receive a reward without a spending requirement.- Reduced deduction: If you buy a $500 piece of equipment for your business and get $10 in cash back, you can only deduct the net cost of $490, not the full $500.
- Reimbursement by employer: If you use a personal card for a business expense and your employer reimburses you, the IRS could potentially consider the rewards you earn as a form of employee compensation, making it taxable. However, the IRS has historically not heavily enforced this rule.
How to report taxable credit card rewards
If your credit card issuer sends you a tax form, it will most likely be a Form 1099-MISC for miscellaneous income. This is typically issued for taxable income of $600 or more in a year.Key takeaways
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