I just got a new credit card that gives me cash back, a percentage of the money I spend. When I imported the refund transaction into QuickBooks, I was at a loss as to where to put the rebate. A little web research brought up two approaches for recording credit card cash rewards in QuickBooks.
1. Offset an Expense
For example, if you take a trip and spent a lot on airfare, you can apply the reward refund to that same travel expense category that you originally used for the transaction. You can even split the transaction into multiple expense accounts. The problem with this approach, though, is that at year-end you don’t have a true analysis of your expenses because it looks like you spent less than you did.
2. Create a New Other Income Account
Any cash back or statement credits you get on your credit cards go here. It classifies the refund as Income, but it still stays outside your Gross Receipts so it doesn’t impact your revenue analysis.
I believe that IRS description is referring to rebates in general, not as to BUSINESS accounting.
It makes sense in a PERSONAL sense: If I buy a TV from Best Buy for $499 and get a $50 mail in rebate, I really shouldn’t be taxed on an extra $50 of income. It just means I spent less on the TV.
But in a BUSINESS sense, that money can’t evaporate into thin air. It must be somehow accounted for, either decreasing an Expense as some do, or showing up as an Other Income, or being recorded as a refund of interest paid to the credit card company if you’re carrying a balance, etc.
Agreed! I like to put it as Other Income so that I can see that I received money without it showing up as Revenue.
IRS says:
“A rebate received by a buyer from the party to whom the buyer directly or indirectly paid
the purchase price for an item is an adjustment in purchase price, not an accession to
wealth, and is not includible in the buyer’s gross income. See Rev. Rul. 76 – 96, 1976 – 1 C.B. 23,
as modified by Rev. Rul. 2005 – 28, 2005 1 C.B. 997.”
That means it’s not income. Ideal but impractical is to reduce each purchase price. Instead, I created a “CC Rewards” expense account. Downside is to always have a negative balance. Also, if there is a large purchase that has to be depreciated, an adjustment to actual price of the item may be appropriate.
I am not an accountant and this is not legal or other advice.
Credit card reward points is akin to a refund or rebate of the finance charges paid on the card. As such, reward points reduces the effective interest rate and can be accounted for as a credit to the finance charge expense account.
Hi Gary, That’s a great idea! Easy to do, and I can’t think of a reason why not!
Thanks for the tip!