Expert: Arthur Naman - 1/6/2011

Question
Hello, I am not sure if you are the one who can answer this question. I am running a business, and I have rewards from our business checking account as well as business credit card account and would like to redeem for cash rewards.  Now the only way to redeem for cash is to have the cash deposited to the business checking account.  If I do that, would it considered an income and is it taxable?  What is the appropriate category for it in the book?  Is it a refund? Also, if I want it to get it deposited and transfer it to owner's checking (as a bonus), what is the best way to do this without having to pay a tax? Thank you.

Answer
From what I have read, rewards from credit cards (and frequent flyer mileage rewards) are not taxable income. Depending on what is purchased, the cash reward can be a credit or offset against purchases, or non-taxable income.

If the reward is received in cash, then a debit to the checking account and a credit to miscellaneous income would be appropriate. In that case, the income can be shown as not subject to income taxes on your annual income tax return.

The payment to the owner is separate from the treatment when the refund is received.

If a sole proprietorship, the distribution to the owner would simply be a capital withdrawal. If a corporation, the the distribution would be salary, a taxable bonus, dividend distribution, etc. There is no way to transfer corporate income to an shareholder - owner without there being tax consequences to the stockholder; repayment of a corporate loan would of course not be taxable to the shareholder.

The distribution of the credit card rewards is no different from any other corporate distribution.