Discover Card Cashback Bonus

No. Currently, the rule is this is treated as a rebate, in effect, you are getting back your own money.

This is distinct from a sign-up bonus, the metaphorical toaster you get just for signing up, which is taxable.

On a lighter note, last year a credit card offered me 10% back on certain purchases. I was warned by those who felt such a large bonus might produce a 1099, and I was prepared to not be surprised. Even though the bonus exceeded $5000, the bank didn't issue a 1099. Confirming my belief that rebates tied to purchases are considered refunds, not taxable.

More to the point, I think, is that it's treated as a discount on the purchase (so if the expense is deductible, then it _is_ taxable).

The interesting issue is when the expense is partially taxable (e.g. a

5% rebate on restaurant meals, when the meal is 50% deductible as a business expense). Is the rebate/discount on the deductible half, the non-deductible half, or ratable? (I'd suggest the latter.)

Seth

No, it's taxable if it has been deducted, not merely deductible.

Only if you use the card for business (in which case you deducted your business expenses, so when you receive a portion of the money back you must report it as income, ie. instead of saying you paid $99 for something, you deduct $100 and report $1 as other business income). For personal use, you don't report anything.

Do you really mean this? What if you used the card to make a personal charitable donation, or buy lottery tickets?

Or when the purchase is a capital investment, or when the expense can be taken as a credit...

To make things even more complicated, my experience is that the cards reward different purchases differently [often quite opaquely], and (I think) depending on whether you are carrying a balance or not, and depending on your total purchases in a period.

Suppose that the period is a calendar year. Your cashback is 1% on your first $10000 of purchases, 1.25% on the next $90000, and 1.5% beyond that. Is the bonus ratable, or do you have to identify specific purchases that received particular bonus levels? Of course, in the real world, the period might not align with the calendar.

If you use cash accounting you also have to deal with receiving the rebate in a year different from the one in which you incurred the expense.

The record keeping on this sounds like a nightmare. Does anyone have any practical suggestions to keep it manageable?

Perhaps it should be worded as saying you can ignore the rebate so long as it is less than the charges and none of those charges provided you with a tax benefit.

Does this come under a de minimus rule? I recall that the IRS stated that, for now, one can keep their miles earned while flying on company paid business. Would the IRS treat this the same, or actually expect that when I charge a $1000 donation, I account for the $20 cash-back, and only deduct $980 as a donation?

Personally I don't think they are ignoring it under the de minimus rule - some of the rebates (or points or whatever) are just too large to ignore.

Rather I suspect it's because they expect a huge public backlash if they start taxing such a widespread, non-cash benefit, and they don't want to take the political heat.

Yes, in this case, if you deducted your charitable contribution or lottery tickets (as a gambling expense), then you should report the cashback as income. However, this is so tedious to track that you need not bother about it, and besides the recaptured income is likely to be so small. As an aside, when I donate a lot I cut them a check so that they don't have to pay the credit card fees; with fees as high as 5% (though I think less) then a $100 donation means the charity really only gets $95 or more.

I don't think so.

That's right; you received a $20 benefit from making the donation (albeit not from the recipient of the donation) so you reduce the deduction by $20. That's why my donations are made on mileage cards, not cash rebate cards.

Seth