Credit Card Rewards: To Be or Not to Be Recorded?

Organizations often use credit card rewards programs to help control costs and improve the bottom line. Clients often wonder if they need to account for credit card rewards and if using them incurs any tax ramifications. Credit card terms vary, and we recommend reviewing the terms closely and consulting with your accountants when making decisions for your organization.

The first step is determining what type of rewards you have. When you select a credit card, there are two types of rewards: points and cash back rewards.

Cash-Back Rewards

Cash-back rewards are considered easier to account for than points rewards because they have a dollar value and the amount earned is simplified. You earn it based on a level of spending. The terms of your credit card cash-back rewards and materiality will determine if you should accrue for the rewards earned or wait and account for them when they are redeemed. In practice, many organizations do not record unclaimed cash back or rewards on their balance sheet or statement of financials position until they are redeemed. Others claim them at the end of the reporting period in a lump sum for the total rewards earned during the reporting period.

In many cases it is just not practical to account for amounts earned on each credit card purchase. Some banks even require a waiting period or spending threshold before the cash-back rewards can be redeemed. Therefore, organizations typically record for cash-back rewards when they redeem them in a lump sum as follows:

*Some organizations prefer to record the earned cash back as revenue; others prefer to record it as a contra (negative balance) expense account. Treating it as a contra expense allows management to see the net reporting period expense incurred. Either approach results in the same net impact on the bottom line.

As with any decision made in accounting, leaders should always consider how material the rewards are to the organization’s overall financial statements in determining how to record them. When it comes to materiality, Auditing Standards (SAS) No. 138 notes that “Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.”

On a sliding scale from material to not material, if rewards earned during the reporting period are individually or in aggregate material to the overall financials, then you should consider tracking and recording rewards earned on each purchase. Or, at a minimum, you should track and record the lump sum earned at the end of each reporting period. If, individually or in aggregate, these transactions are not material, then your organization may decide it is more practical to record cash-back rewards when redeemed.

If the organization records the credit card rewards earned for each purchase or in a lump sum at the end of each reporting period, the entries would be as follows:

Recording the earned cash-back reward (either by transaction or in a lump sum at end of the reporting period):

Recording the redeemed cash-back rewards, for rewards that were recorded when earned:

Points

Valuing credit card points earned is more complex and you must closely review the terms of your credit card points agreement. Issuers can use varying multipliers for different types of credit card purchases. Each type of purchase could have a different value and these values may fluctuate.

Sign-on Bonuses

Bonuses for signing on to a credit card company’s card program would be recorded as other income when the agreement is signed. Determining if these sign-on bonuses are taxable depends on if they are tied to spending. If you receive a sign-on bonus without having to meet any spending requirements, then it is considered taxable income. If the sign-on bonus requires a level of spending within a certain period, then it is not taxable income. Most credit cards do have some type of spending requirement to earn the sign-on bonus, making it non-taxable.

Taxability of Rewards

In general, business credit card rewards earned are not considered income, which means they are not taxable. Instead, credit card rewards are considered rebates on items you purchased with a credit card. However, the IRS may consider some rewards programs taxable income.

If you are not required to make a purchase to use the points earned, then the points are generally considered taxable income. If the value of points earned exceeds $600 during the year, then the credit card company would be required to report that income to the IRS and send the customer a 1099-MISC form.

The IRS treats cash-back rewards as a rebate on spending, not as income — so you are not required to pay income tax on the rewards. If a business receives cash-back rewards or gift cards, then it should reduce the business deduction of the items purchased with the rewards credit card.

If employees are using and earning credit card rewards and gift cards from corporate credit card purchases and receiving those reward benefits, then the value of the cash or gift cards they receive would be considered taxable income to the employee. Employees should track the amount of the rewards they receive during the tax year and report them on Line 21 of the Form 1040 as other income.

Navigating Credit Card Rewards

Credit card rewards can be a valuable tool for organizations to manage costs, but the accounting and tax implications can be complex. Cash-back rewards can be recorded when earned or redeemed, depending on materiality. Valuing points is intricate due to varying multipliers. Sign-on bonuses may be taxable based on spending requirements. Business credit card rewards are generally not taxable, but some programs may be. Organizations should review terms, consult accountants, and consider tax rules for employee rewards. Understanding these implications ensures accurate accounting and compliance.