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Rewards earned via business spending are tax-free, for now

Summary

The IRS has been consistent in its interpretations, but increasing complexity could prompt changes

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Question

Dear Cashing In,
I use miles earned on business credit cards for travel that is not business-related. How are the awards treated on my taxes? Do they reduce the cost of goods purchased, or do they increase the salary I get from the business? — Sohan

Answer

Dear Sohan,
Fortunately, the Internal Revenue Service has had a pretty consistent interpretation of how to treat frequent flier miles ever since the programs became popular years ago.

With only rare and unusual exceptions, frequent flier miles are treated as rebates on the flights you take. If you earned those miles through business activity — either by charging business expenses on a miles-earning credit card or by taking a business trip — they are not taxable. They just reduce (or eliminate) the cost of the trip. This rule applies whether the trip you take using miles is a vacation or a business trip.

The IRS issued guidance in 2002 that says, in part, that it “will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”

On questions as sensitive as taxes, however, I always prefer to consult experts. I put your question to Mark Luscombe, principal federal tax analyst with Wolters Kluwer Tax & Accounting US.

He agreed that yes, reward points reduce the price of what was purchased and are not taxable. “The IRS took this position because of the administrative complexity of trying to determine what would be taxable and what would not be taxable,” he says. In other words, it would be a huge headache to try to figure out, for instance, how to allocate miles earned through business activity versus miles from personal activity — to say nothing of how you would value a plane trip award for a flight on which seats are sold for many different prices.

In 2012, though, Citi made waves when it issued 1099 forms to some customers who were given miles in exchange for opening a bank account. Those had to be reported as income, Luscombe says, because they “looked like a form of interest that would be taxable.” The issue would not have arisen but for Citi declaring its issuance of reward miles to be income. A U.S. Tax Court ruled that because Citi counted the miles as income, their value should be reported for income tax purposes.

Besides the Citi bank account example, Luscombe says he is unaware of any tax cases that have arisen recently that challenge this notion of the treatment of reward points and miles. However, he says that as reward programs become more complex, and as people increasingly comingle personal and business accounts, the IRS could seek to revise its long-held position.

“As the uses of airline mile reward programs proliferate beyond the standard miles being awarded by an airline based on airline travel on that airline, it becomes increasingly possible … that you move into a taxable situation beyond the current protection of IRS guidance,” he says.

The best advice for steering clear of the IRS, of course, is to consult a tax preparer. But based on years of precedent, you’re on pretty steady ground if you don’t count travel rewards as income.

See related:1099-C frequently asked questions, Cash back rewards scarce for business owner with bad credit

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14.34%
Airline
16.33%
Cash Back
16.55%
Reward
16.49%
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16.51%

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