In many cases, a business owner may find that they have to pay taxes on business credit card rebates they receive. The question is “Are these payments taxable?” This is not an easy question to answer. The fact is that many rebates are treated as if they were income for tax purposes. Some are not, and this information will help you determine which rebates are going to be taxable and which are not.
“Income” means three things for tax purposes. First, it is your net income, or gross income less your expenses. Next, it is your net profit, or income minus your expenses. Finally, it is your net debt, or total of all your debt less your assets. Your rebate is a portion of your income.
A credit card rebate is a reward for using the credit card. There is typically a set percentage that one gets back from their rebate when making purchases. The rebate may vary by credit card company and even by individual card. You usually do not get to keep the rebate.
How can a credit card rebate be taxable? The Internal Revenue Service has three rules about rebates. First, they allow them to be tax-free if they are not given to the individual in cash. They are only taxable if they are received as a condition of employment or as part of some other refund program. They cannot be applied to any income tax and they must be a retail purchase.
If you have a credit card rebate, you have to report it to the IRS on time. There are certain deadlines for reporting. If you wait longer than what is required, you run the risk of being hit with a rebate tax. In addition to reporting it to the IRS, you should also keep a running total of the amount of your rebate. You should keep this total with you at all times. It is very easy to forget to report a rebate.
The second rule is that if the rebate is not a retail purchase, it is not taxable. So, a credit card rebate on the purchases of magazines, books, movies, etc. would not be taxable. But a rebate on gas for driving to and from work would be taxable.
Now, let us examine whether a credit card rebate is taxable income. The answer is that it depends. Rebates are typically not taxable if they are not included as an itemized deduction on the year's income tax return. Also, certain rebates are only available if the taxpayer has taken an eligible tax deduction and was awarded that deduction. A mortgage or other financing loan is one of these types of rebates.
In conclusion, a credit card rebate is usually not taxable. However, some rebates are only available if the rebate is included in the consumer price index (CPI) or otherwise taxable. In such cases, it is probably a good idea to report the rebate as a tax-free benefit. In most cases, if you use your card at a retailer, it is considered a retail purchase and you may be eligible for the rebate. If not, report the rebate as an un-taxable benefit.
In my opinion, if you use your card at a retailer and then use the card to make purchases at other retailers, then you have not used your card at all and will not be eligible for a credit card rebate. It would be very difficult to determine whether or not rebates are taxable. It would almost certainly be a complex calculation. This is especially true if the rebate claim is made for purchases . . . . . . you make at other retailers after you have used your card at the first retailer.
You may also have a problem if you are able to obtain a refund and then use your credit card at another retailer shortly thereafter. For instance, if you purchase a dining room set at your local department store, but use your credit card at an online merchant, you may be able to claim a rebate on that purchase. However, if you make another purchase at that same merchant shortly afterward, you may be claiming a refund that exceeds the amount of rebate you are entitled to. The refund could even exceed the amount of rebate you are entitled to unless you can prove that the credit card purchase was made in conjunction with another activity, such as a reservation, or when you show proof that the other transaction occurred as a result of your reservation.
If you do a quick analysis of rebates on the internet, you will see that some rebates are very high, while others are low. So, be very careful in determining if your rebates are earned. You may find yourself paying more in tax than you thought if you are not careful.