The IRS does not require that you reduce your business expenses or report as income the amount your receive as a cash back reward on your business credit card.
hello @ChelsiE2 do you have a source of any kind to cite for this. I just see conflicting info. I dont think CC points are ever tied to individual purchases but there are many articles saying to reduce overall expenses by the amount of rewards. thanks S
Assuming all purchases are made with a business credit card, and all cash back gets credited to the business income. There's three ways to do this, and one way is no better of worse than the other. You just pick what works best for you.
#1 - Reduce your expense by the amount of cash back received. This can be an accounting nightmare if you have a large number of purchases that qualify for the cash back incentive during the month.
#2 - Report the cash back as general business income.
Now others are screaming about #2 as "but wait! That makes it taxable income!" Yes, it absolutely does make it taxable income. The same exact amount of taxable income if you use #1 above.
#3 - List your credit card issuer (who you pay the bill to) as a vendor in your accounting software. When/if you pay the bill each month, it's recorded as paid to that vendor, including any interest for that month. If you need to separate out the interest payment on the credit card, that can be a sub-category for that vendor in your accounting software. If you get cash back, it's a refund from that vendor and is recorded as a refund in your accounting software.
For #3, if you're using Quickbooks 2018 or newer I can talk you through setting this up in QB if you need help with that. Just make a backup of your current QB data file before we/you go changing things.
yes it's income since it reduces the amount you paid for deductible expenses. for TT just pick up on line 5 of schedule C input form ( on the actual schedule C it will show up on line 6). or if there are CC fees reduce them.
I will do solution 1 as I'd rather not increase my gross. Nearly all my transactions generate cash rewards; periodically redeemed into my checking. Cant I put them all in my largest expense category? or across a couple categories? doesnt sound too nightmarish. thx
Cant I put them all in my largest expense category? or across a couple categories?
Expenses go into whatever category applies to a specific expense - which it what I assume you've always done. The cash back just gets included in the general business income. I would expect that since the cash back is a traceable transaction, that's the way you'd need to do it to avoid raising eyebrows at the IRS. Especially if you ever get a tax reporting document (such as a 1099-MISC) for the cash back. But I think chances of that are rather negligible.