A person's self-employment requires overnight trips. To pay for the room, the person often uses rewards points that he earned from personal expenses on his credit card.
Is the equivalent value of the points deductible, or must money actually be spent for it to be deductible as a business expense?
If the points were not taxable income then their use is not deductible.
What if some of the points were purchased for cash? Some frequent-guest plans allow that.
What if some of the points were earned by expenditures made entirely for the purpose of acquiring points? (It has happened that, by "staying at" (or at least registering at and paying for) a cheap weekend room near one's home, he acquired enough points to pay for a much more expensive room when traveling. Some years ago, a friend of mine played that game well enough that for around $1300, he took his family to Australia for several weeks, including airfare and hotels.)
Suppose that I pay $500 for (1) a personal vacation, including 4 room-nights that are nominally $125 each, and (2) one night for a business stay, nominally $200. 2/7 of the nominal cost is deductible expenses; how much of the $500 is deductible?
Seth
Would you use FIFO accounting for points?
Lumped personal/business travel expenses are apportioned by the number of business travel days relative to total travel days. I think that is the closest rule that applies here.
Steve
Having read a few replies, here's why I feel it should be deductible-
I would agree that the value of rewards a self-employed person earned on prior BUSINESS trips are not deductible because the person probably already deducted the full amount paid and "forgot" to include the rebate as income (i.e., reduce the business expense deduction by the value of the rebate).
Not everything with a value is deductible.
If not reported as taxable income, not deductible.
Cite?
I don't understand the whole premise of the OP (sorry!). Why not use a real payment in $$ for the lodging and use the points derived from that as the OP would see fit, and as allowed by law? Using reward points for deductible expenses is (IMNSHO) just ludicrous.
Note "personal expenses".
Suppose I buy a computer for *personal* use (no deduction), and the deal includes a $50 mail-in rebate coupon. Now I go spend that $50 on a business expense - of course it's deductible, even though I didn't treat the rebate as income.
Aren't the personally-earned reward points just like a rebate? They're not income, just a discount on the purchase.
-Mark Bole
See
Then you would have tax basis in those points. That basis would create a deduction if the points were used for business purposes.
No tax basis in the points. Therefore, no deduction when the points are used.
The costs incurred for business purposes are deductible. From your facts, that would be $200.
I think $100 is claimable as a business expense since TP bought five nights of hotel rooms for $500, and only 1/5 of this is business, and there is no separately-documented amount paid for the business night. $142.86 may be arguable (2/7 of $500). But not $200.
Steve
Why not? He paid, say, $60 for two hotel rooms that he didn't even use, plus 20,000 points. You are saying that he bought the hotel rooms, and the points were free; but he would say that he bought the points, and ignored the free hotel rooms. As proof, it's clear that he'd have done the transaction if the hotel said "there are no rooms available, but if you pay us we'll pretend there were and give you the points anyway" and he would not have if they'd said "this weekend we're not giving out points".
I was intentionally vague. The personal vacation came first, and earned enough points for the business night. Does that change your answer? Why? Suppose the plan allowed it to be done as one transaction: link the two reservations in advance, and pre-pay the entire bill. No points earned or paid, but no charge for the final room-night.
Seth
This is outside your example, but I think it falls apart if the TP has at any point earned points from business spending. The IRS has sort-of stated they will not pursue taxation of airline, hotel, and credit-card points even though technically they are income when earned on business spending and then used for personal use. That I recall, there was industry and Congrssional pressure that the Service not pursue this.
For the TP to collect this untaxed income, then turn around and try to claim a deduction for spending points, probably doesn't wash with an examiner in a general sense. If the TP has done careful accounting and can demonstrate they are not trying to have it both ways, then maybe.
Steve
,
However, if its value can actually be ascertained, .... It depends on how the points are earned in the first place.
Usually, people use business-earned points for personal expenses.
If the expense that earned the points was not deductible, then this could be considered a recovery, which IRC 111 tells us may be excluded to the extent where the original expense wasn't deductible. Therefore, I don't see your statement as a valid argument.
On Jun 10, 12:05 pm, snipped-for-privacy@speedymail.org (Steve Pope) wrote: purposes are deductible. From your
Every hotel I've stayed in has provided an itemized bill that showed the charge for each night.
Mostly because the IRS has said, "not." I'm not willing to argue with them because they've also said "not" when it comes to recognizing income for points earned. They have said, "not" because they don't want to litigate value of the points in question over and over again.
As others have said, the tax basis in points is the amount of income recognized when the points are earned. No income, no tax basis.
The act of paying cash directly for points is an exception. (I mean a straight up cash only for points only transaction.) Getting points for vacation travel is not an exception. Getting points for business travel is not an exception.
cite?
If grandma give me a gift of cash, it is not taxable income. If I use that cash to pay for business expenses, that is deductible. Is there a cite that says points acquired due to personal, nondeductible expenditures are treated differently?
Similarly if the cash derived from loan proceeds (which are not income either).
There is a principle in taxation that cash is cash, and its source (gift, loan, earnings) does not affect the taxability of subsequent transactions using that cash.
But hotel points are not cash, so that leaves open the possbility (not the certainty) that they are not treated as cash, and that their source may factor into the taxation of how they are used.
Steve
Rather, I think, their basis. The question is then how to calculate that, given that a single transaction purchased (inseparably) both points and other stuff.
Seth
Grandma's basis in the cash is its face value. The fair market value of the cash is also its face value. Therefore basis flows to you and when you use the cash for an ordinary and necessary business expense you get a deduction for your basis in the cash which is its face value.
Do you post using the screen name Jainen on Kaye Thomas's board? Just asking.
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