Could credit card rewards be considered income?

[Ready]

I'm curious to get opinions on a topic I've wondered about for a while. If you work at a job where you do extensive travel, take clients out frequently for dinners, and run significant business expenses on your personal credit cards, you have the potential to generate substantial rewards. Say for example you have a cash back 2% credit card and you run $100,000 in expenses through the card. Your company reimburses you the full $100,000, and you pocket the $2,000 in rewards.

Is there some threshold where the IRS could deem this to be a source of income that is required to be reported? From the research I've done, the IRS has deemed credit card rewards to be considered a discount on a purchase, and not a source of income. However, it has been silent on the topic of using the card for business expenses, where the entire purchase pre-discount is reimbursed to you by the employer. Is the silence in the tax code just a loophole, or could the IRS make the case that because of the 100% reimbursement you had a duty to report the income?

In the industry I work in, we have hundreds of employees who routinely rack up very large credit card bills, so it has the potential to impact quite a few people if the IRS changed their interpretation on this source of income. Has anyone had any experience with this they can share?

 

[gromit]

They are not taxable according to this article:

Credit Card Rewards - Are Rewards & Frequent Flyer Miles Taxable Income?

"In 2002, the Internal Revenue Service announced that it would not pursue the question of whether frequent flyer miles, and rewards and other promotional discounts awarded by credit card companies to cardholders."

 

[GrayHare]

Since merchants have increased prices to pay the money refunded via such rewards it is not income but rather a refund. Like airline miles for business travel, the rewards are technically property of the employer. Most employers let employees keep the rewards and miles as a sort of benefit. I suppose if these amounts ever get large enough the IRS will seek to have them listed on W2 forms.

 

[jetpack]

As far as I know, in the eyes of the IRS credit card cashback rewards are considered to be a "purchase price reduction". If they are using it for reimbursed business expenses, they should be reducing the reimbursement price by the amount of the reward. Airline miles are not enforced. http://www.irs.gov/pub/irs-drop/a-02-18.pdf

 

[Ready]

I've seen the IRS rulings which state they do not intend to pursue the rewards as income, but I've never seen anything that addresses the specific situation of when the expenses are 100% reimbursable by the employer, and thus create unintended income for the credit card holder.

In theory the employer should be entitled to the reward. In practice, the employer has no idea which employees hold rewards credit cards and which ones hold cards with no reward. It would be virtually impossible for the employer to keep track of this or attempt to get the rewards from the employees. Reward cards have so many different redemption methods anyway that keeping track of this would be impractical.

It appears to simply be a loophole that allows someone to generate tax free income. I've just always wondered what would happen if the IRS uncovered an individual who received a substantial amount of rewards through this method, and whether they might intend to treat it as a special case and thus deem it taxable.

 

[Alan]

My company always mandated the use of the company credit card for which they always got the benefit. For the non frequent traveler in the company they would allow a personal credit card.

We were allowed to keep our FF miles and I have purchased many flights for myself and family members over the years.

 

[ziggy29]

I suspect there's not enough revenue in this for the IRS to really care to pursue, given the added compliance and enforcement costs compared to a relatively paltry amount of additional tax revenue.

 

[jfn111]

I was also with a company that required we use the company CC. Most mega corps, with large sales forces, figured out long ago how much money this added up to.