Business credit cards can be a convenient way to pay for everyday expenses, build credit, and track spending.

Plus, they may also offer valuable rewards. That’s a major selling point – but many business owners are left to wonder: Are my credit card rewards taxable?

When it comes to taxes, it’s always smart to consult your tax professional.

As with so many tax-related topics, there’s a short answer and a long answer. The short answer is no, you don’t have to pay taxes on your credit card rewards. The long answer is that credit card rewards and other perks may have tax implications, depending on how they’re disbursed and how you use them. In this article, we’ll tell you what you need to know.

Regular Rewards Aren’t Taxable

Whether your business credit card gives you rewards points or cash back as a percentage of your monthly spending, the IRS doesn’t consider those perks to be taxable income. Instead, they’re treated like rebates – like if you bought a $300 coffeemaker for your office and sent in a mail-in rebate to get $50 back. In that scenario, the IRS would simply view that transaction as the purchase of a coffeemaker for $250. The same principle applies to credit card rewards.

Some Signup Bonuses Could Be Taxable

Some business credit cards come with special introductory offers of a lump sum of points or cash. Usually, these promotions have a spending requirement – like charging $5,000 in the first 90 days to get a $500 cash bonus. Like regular rewards, these aren’t taxable.

However, if you receive a bonus with no spending requirement, like a $500 cash bonus just for opening an account, that’s considered taxable income. If the bonus is $600 or more, your credit card issuer will send you a 1099-MISC tax form – but in any case, you’ll need to report it on your tax return.

The rule of thumb is: If you spent money to get the bonus, it’s not taxable. Just like the coffeemaker example, you need to be getting money back for it to be treated like a rebate.

Rewards Spending Isn’t (Fully) Deductible

Ordinarily, legitimate business expenses can be fully written off at tax time. But this isn’t the case with goods or services purchased with rewards points.

Going back to the office coffeemaker once more, if you spent $300 and then got a $50 rebate, the IRS would view that as a $250 purchase, and you could claim a deduction of $250. The same goes for credit card rewards. So, if you booked a $1,800 flight to a conference and applied $800 worth of rewards points, the deductible out-of-pocket cost would be $1,000. And if you used rewards to pay for the whole thing, you’d have no deduction.

You’ve Got Two Options for Using Rewards

If you’ve been putting your business credit card to frequent use, you might have amassed a lot of rewards. What’s the best way to use them? The answer depends on your specific circumstances and goals. Generally, you’ve got a couple of choices:

1. Use them for your business. Regularly earned rewards points and cash back can help to offset the cost of office supplies, fuel, travel, and other recurring business expenses. You can also use rewards as employee bonuses – and since they’re already paid for, you won’t have to report them as taxable employee compensation.
2. Use them for yourself. Since you’re not able to write off business expenses paid with credit card rewards, you might choose to put them towards personal purchases like gifts, meals out, or vacations. It’s important to keep business and personal spending separate, but as long as you’re keeping proper records, the choice is yours.

Planning Is Key

If you’re the sole proprietor of your business, you can withdraw cash back or redeem points whenever and however you wish. If you have partners, it’s essential to get on the same page about who can use rewards and what they can be used for. It’s a best practice to put this in writing in your business’s operating agreement along with other company credit card policies. And when it comes to taxes, it’s always smart to consult your tax professional to make sure you’re operating within the law and to your best advantage.

Play Your Cards Right

For more advice on making the most of your business credit card and other financial tools, consult your financial institution.