So, you’ve applied for a new business credit card, and you’re ready to start spending and taking advantage of your credit card rewards.
But how do you account for these rewards? Is cashback considered income, a non-expense, or something else? What if you got a welcome bonus? Are there any tax implications there? In this post, we discuss some considerations for dealing with the different types of credit card rewards.
Of course, individual circ*mstances and card terms will vary, so please consult with your professional advisors when making decisions for your business.
How are credit card rewards treated in accounting?
Generally, credit card rewards are not considered income, so they’re not recorded on a balance sheet. If your credit card has a points-based system or airline miles, then you probably won’t need to report your rewards. Cash rewards are the only exception—if you receive a cash bonus, like a sign-up bonus, then this will be considered other income by the IRS, and so it will need to be recorded on your balance sheet.
There’s no definitive guidance in U.S. GAAP about how to account for credit card rewards on your financial statements, so you will often have to rely on the credit card companies to tell you whether your rewards are considered taxable income. They’ll usually do so by sending you a 1099-MISC form, but only if your rewards exceed $600.
Let’s take a closer look at the difference between cashback rewards and points-based rewards and how to account for each.
Cashback vs. points
Your first choice when choosing a credit card issuer is what kind of loyalty program you want: cashback or reward points. Since cashback is denominated in dollars, it tends to be easier to account for.
Depending on the terms of your card, cashback could be considered an asset that you accrue until you redeem it. The credit card company giving you that cashback may be booking the amount on their balance sheet as a liability to you.
If your rewards are denominated in points—well, what’s a point worth? If the value of a point changes, do you book realized / unrealized gains when you finally redeem them? It’s certainly possible to manage that complexity, but with cash, the value doesn’t change.
Often, accountants don’t put unclaimed cashback or rewards on their balance sheets, and instead only log it when it’s redeemed as a statement credit. But if for some reason you wanted to—perhaps the accrued has ballooned to something material—posting the value of the asset would be quite tricky to do with points, and their value can fluctuate against the US dollar without their rates being reverse-engineered by folks like The Points Guy.
Sign-on bonuses
How might you account for a sign-on bonus, i.e., a reward in cash that you receive for enrolling in a card program? This would be considered a monetary incentive and would need to be treated as other revenue. Several financial institutions are issuing 1099s for any sign-on bonuses they provide, meaning they are being reported to the IRS as taxable income paid to you. You will only receive such a form if your cash bonus exceeds $600 put into your bank account.
In a business’s Chart of Accounts, a sign-on bonus might be recorded as follows, assuming it was received on the day of signup:
Debit
Asset
Checking account
$500
Credit
Revenue
Other revenue
$500
Earned cashback
Earned cashback could be treated differently as it is earned as a result of spending money on the card. You might treat it as a cash rebate, as detailed in IRS Publication 525.
For example, if a business goes and purchases computer supplies and then receives cashback as a result of making that purchase, that business could use the cashback to reduce the original purchase price. This wouldn’t increase income directly, but would increase the tax basis because the business expense level has been reduced.
If the business were to purchase $400 worth of computer supplies, and the purchase and cashback were all to happen on the same day, the accounting using the above approach might be:
Debit
Expense
Computer supplies
Purchase
$400
Credit
Expense
Computer supplies
Redeemed cashback
$6
Credit
Liability
Ramp card
$394
Although it is more customary to combine the two expense lines into a single line:
Debit
Expense
Computer supplies
Purchase
$394
Credit
Liability
Ramp card
$394
In truth, there is likely to be a separation in time between when cashback is earned and when it is redeemed. In that case, a business might want two entries:
Purchase is made
Debit
Expense
Computer supplies
Purchase
$400
Credit
Liability
Ramp card
$400
Cashback is redeemed
Debit
Liability
Ramp card
$6
Credit
Expense
Computer supplies
Redeemed cashback
$6
Card providers often permit cashback to be redeemed several periods later, and after the original purchase period has been locked, even though it is applied to the original purchase. If a business were trying to account for this accurately the journals might be:
Purchase is made
Debit
Expense
Computer supplies
Purchase
$394
Debit
Asset
Accrued cashback
Cashback
$6
Credit
Liability
Ramp card
$400
Cashback is redeemed
Debit
Liability
Ramp card
$6
Credit
Asset
Accrued cashback
Redeemed cashback
$6
However, accountants often do not post accrual entries for cashback.
Redeeming cashback in a lump sum
In practice, cardholders don’t generally redeem cashback on individual transactions, but they will periodically redeem the cashback that they’ve accrued as a lump sum. How might we think about this?
The concept is no different: the lump sum of cashback is an aggregate discount on all the purchases that have been made on the card over time.
The most common way to manage the accounting is to apply cashback to a single account, i.e., a Cashback Earned account or similar. Some people use an income account, whereas others prefer a contra expense account (i.e., an expense account with a negative balance), but when aggregated with all monthly expenses would result in the right expense value.
Debit
Liability
Ramp card
$500
Credit
Expense/Revenue
Cashback earned
Redeemed cashback (all purchases)
$500
Either approach can work, depending on your circ*mstances and preferences. Adding cashback to income but not expenses should result in the same taxable difference as subtracting cashback from expenses and deducting the result from income. However, a purist may choose to use a contra expense account, especially if they consider cashback a reduction in the cost basis of the original expenses.
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Are credit card rewards taxable for a business?
Cash rewards are taxable for a business, while other types of rewards are not. So, if you’re earning rewards points or frequent flyer miles, these will not be taxable deductions on your business expenses. Also, cash rewards are only taxable when they’re earned, so they won’t be tax-deductible if you haven’t redeemed them yet.
Avoid the accounting headache
With Ramp, you can save an average of 5% by spending less time and money across your entire business, and one of our goals is to simplify the work you need to do to compensate for it with our accounting automation. For most accounting providers, we allow you to sync your claimed cashback to your accounting system, so we do all the operational work for you.
If you’re on a program that uses different cashback rates for different categories, or worse, points, you might be in for a bit of an accounting headache when it comes to month and year end closing. Ramp’s rewards program has been designed from the ground up to help you close your books faster.
The information provided in this article does not constitute accounting, legal or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.
