Credit Cards and Taxes: Frequently Asked Questions
With April 15 just around the corner, it seems as good a time as any to revisit some common questions about taxes and your credit card. Are your credit card rewards taxable? What about credit card sign-up bonuses? How can you optimize your credit card spending if you own a small business? Read on to find the answers to these questions and more.
Are your credit card rewards taxable?
Assuming that you earned your rewards from your personal credit card spending, they are not taxable. That’s because your rewards–whether they come in the form of points or cash back–can be considered a discount or a rebate, which is not taxable.
It gets slightly more complicated, however, if you own a business. Rewards that you earn as a result of credit card spending on business expenses may or may not be taxable, depending upon whether your rewards are in the form of cash back or points/miles.
This post explains it all in detail, but essentially, if you are receiving a cash rebate as your reward, you need to treat the purchase as if you received a discount and adjust the cost basis of your purchase accordingly. If you’re receiving miles or points as your reward, however, the IRS will not attempt to tax them. If you convert those miles or points to a cash equivalent, though, they do become taxable. It’s therefore strongly recommended that small business owners use a business credit card that earns miles or points rather than cash back.
Are credit card sign-up bonuses taxable?
The answer to this question is in a bit of a gray area. However, rewards you earn from opening a new credit card account should not be taxable as long as your bonus is tied to a spending requirement. Again, the reasoning is that a bonus you earn after meeting some initial spending requirement is more akin to a rebate than income. So when the credit card company requires you to make at least one purchase before earning your hefty sign up bonus, they’re actually doing you a favor.
If, however, the bonus does not have a spending requirement and is awarded simply for opening a new account, it gets the same tax treatment as if you received a gift. If the gift’s value–which the bank is allowed to set–exceeds $600, the bank is required to send you a 1099-MISC form. Gifts of less than $600 will usually not generate a 1099, but are still required to be reported on your tax return.
Is credit card interest tax-deductible?
Personal interest, which includes credit card and installment interest incurred for personal expenses, is not tax-deductible.
If, however, you own a business, credit card interest may be deductible. Business interest, which is interest paid on a loan taken out for business purposes, is a legitimate business expense. This includes credit card interest, provided that the debt is purely related to a trade or business activity. Only interest that accrues from business-related purchases is deductible. It’s therefore not advisable to put personal expenses on your business credit card.
Tip for Business Owners: Save on Taxes by Prepaying via Credit Card
If you use cash basis accounting, it may be possible for you to save on your taxes by using your credit card to manipulate the timing of your expenses and revenues. This advice is most useful when nearing the end of your tax year. See this post for complete details.
Disclaimer: I am not a CPA and this should not constitute tax advice. Before taking any action, consult a tax professional to assess your own personal situation.