Many companies offer cash back rewards for purchasing their product, but is this reward considered taxable income? Watch this video to learn more about cash back rewards and taxable income.
Video transcript:
Hello, I'm Scott from TurboTax with some information about how you should treat your cash back rewards for tax purposes.
You're probably familiar with all the different credit card companies offering cash back rewards or even those mail-in rebate offers you receive on certain goods. But if you think you need to report these rewards on your tax return, you’ll be happy to know that it isn't necessary in most cases.
For most of these rewards that are given to consumers, the IRS treats them as discounts rather than income. If you think about it, it's not as if any of these companies are offering you cash for nothing; more often than not it's used as incentive for you to purchase something.
And since a discount isn't taxable, there's no need to keep track of all your cash back rewards to prepare your tax return.
However, there may be times when you need to reduce the amount of a deduction to reflect the discount that a cash back reward provides you with.
For example, suppose you're self-employed and you purchase a cell phone that you use solely for business purposes. In this case, the cost of your phone is fully deductible on your return. But remember, you can only deduct your actual cost. So if the company charges you $200 for the phone but allows you to obtain a $150 rebate through the mail, you must reduce your deduction by $150. At the end of the day, you only paid $50 for the phone, and this is all the IRS will let you deduct.
It's important to remember the difference between a cash back reward for a purchase you make and a taxable award or prize. To illustrate, suppose the company you purchase the cell phone from holds a drawing for all new customers, with the winner to receive a $25,000 cash prize.
Unfortunately, if you win the prize, you can't treat it as a discount and you will have to report the entire amount on your tax return.
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