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Sizing up a credit card rewards scheme


Points pros live lavish lifestyles with their rewards points they collect, but if you’re planning to get in on the game, make sure the fees won’t outweigh the benefits

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QuestionDear Cashing In,
I’ve been thinking about starting a business for the purpose of collecting cash-back rewards on my credit cards. Here’s how it would work: I would personally purchase services from my own business using my credit cards on the business’ online merchant service account. Upon completion of the purchases, my business would refund me the purchase cost in the form of a check. This refund check would then be deposited into my personal bank account to pay off the balance on my credit card. This would result in cash-back rewards on the use of my credit cards. The business would not have produced income on the sale of service because every sale would be refunded in the form of a check. Assuming the obvious roadblock of having merchant service fees higher than the rewards, would there be any tax or other legal issues with this? – Jim

AnswerDear Jim,
I’m going to assume here that this is a theoretical exercise. But such exercises can be instructive, much like a brain teaser or a riddle.

First, let’s start by stipulating that this column should never be taken as the final word on legal or tax matters, which are better directed to your attorney or accountant. Generally, if something feels questionable, it is best to receive advice from professionals.

There are a few potential red flags in your scenario that would give me pause. On taxes, you would need to consider whether the Internal Revenue Service would deem your business entity to be a business or a hobby. Because what you are calling your business entity really has no intention of turning a profit, it might be difficult to justify it as a business for IRS purposes. That would limit your ability to deduct any expenses associated with this enterprise. Businesses don’t have to make money, and many don’t, but a business that never turns a profit and is not designed to doesn’t actually sound like a business.

Legally, consider that federal bank fraud is defined as obtaining “any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.” That passage sounds as though if you are honest in your dealings, you are in the clear.

However, executing this scheme is going to be impossible if you are honest, for a number of reasons.

As you mention, one glaring flaw in this plan is the credit card fees. Businesses pay a small percentage in fees, typically around 2 percent, for the privilege of accepting cards. That means that your business would pay charges equal to about 2 percent of the credit card transactions, which would probably cancel out the rewards you would earn personally.

But beyond that, there are other obstacles here. In order to accept credit cards, merchants must agree to a set of conditions in a contract with the credit card processor. These agreements typically stipulate that any refunds issued to customers who used cards cannot be in cash or cash equivalents. That is, any refunds have to be issued back onto the credit card. For instance, if you search online, you can find copies of some of these agreements. One by Wells Fargo says that merchants cannot “issue refunds for Transactions by cash or cash equivalent (e.g., check).” Your plan won’t work unless you can have money deposited into your bank account to pay off the card.

In addition, when the payment processor sees repeated large charges by only a single customer – you – it is likely the processor would begin denying charges because that pattern appears fishy. Also, the bank where you have your checking account might become suspicious if the amounts deposited from credit card refunds match the amounts paid to your credit card, because that pattern, too, could appear to be fraud.

For several different reasons, then, this scheme isn’t going to work. But it was fun to break it down and figure out why!

See related: How one woman travels the world on credit card points

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