How to Account for Credit Card Rewards and Use Them Wisely

Accounting for credit card rewards can be a bit tricky, but don't worry, we've got you covered. You can earn up to 5% cashback on purchases with a rewards credit card.

First, make sure to track your rewards earnings regularly to avoid missing out on points or cashback. According to the article, rewards can be redeemed for statement credits, gift cards, or travel.

To maximize your rewards, focus on using your credit card for daily expenses like groceries and gas. For example, a rewards credit card may offer 3% cashback on gas purchases.

By using your credit card wisely and tracking your rewards, you can earn a significant amount of cash or points over time.

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Earned cashback can be treated as a cash rebate, as detailed in IRS Publication 525. This can help reduce the original purchase price, increasing the tax basis.

If a business purchases $400 worth of computer supplies and receives cashback, it can use the cashback to reduce the purchase price. This wouldn't increase income directly, but would increase the tax basis.

In some cases, cashback is earned and redeemed on the same day, while in others, there's a separation in time between earning and redeeming.

Cashback is denominated in dollars, making it easier to account for.

Since cashback is considered an asset that you accrue until you redeem it, the credit card company may book the amount on their balance sheet as a liability to you.

Cashback rewards are often not put on balance sheets until they're redeemed as a statement credit.

On the other hand, rewards denominated in points can be tricky to manage, especially if their value fluctuates against the US dollar.

The value of a point can change over time, making it difficult to determine when to book realized or unrealized gains.

If you want to post the value of accrued points, it can be a complex process, especially if the points have a material value.

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Cash back on credit cards rewards cardholders for making purchases by returning a percentage of the money spent.

You can think of cash back as a cash rebate, which is treated differently than earned income. If you purchase computer supplies and receive cash back, you can use the cash back to reduce the original purchase price, increasing the tax basis of the business expense.

In practice, cardholders don't generally redeem cash back on individual transactions, but instead periodically redeem the cash back that's accrued as a lump sum. This lump sum is an aggregate discount on all the purchases made on the card over time.

To manage the accounting, you can apply cash back to a single account, such as a Cashback Earned account or a contra expense account. Some people use an income account, while others prefer a contra expense account, but both approaches can work depending on your circumstances.

The accumulated cash back rewards can be used in various ways, such as paying your credit card bill, getting a check, or making a direct deposit to a bank account. Exactly how cash back rewards work varies by credit card company and even by individual card.

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You can redeem your credit card rewards online, through the issuer's mobile app, or over the phone, depending on the card.

The most common credit card rewards redemption options include cash back, travel purchases, and gift cards. To redeem rewards for cash back, you can choose from direct deposit, statement credit, or a check. Some issuers may even mail a physical check or allow you to withdraw cash from an ATM.

Redeeming for a statement credit is a popular option, as it reduces your credit card balance. However, a statement credit often isn't considered a regular payment on your bill, so you'll still have to pay at least the minimum amount due each month out of your own pocket.

You can also redeem rewards for travel, such as hotels, flights, and more, by using your points or miles through an issuer's portal or by transferring points to an airline or hotel partner. To access these portals, you'll have to sign in to your credit card account.

Some issuers allow cardholders to redeem rewards for gift cards, but the redemption options and amounts may vary. For example, U.S. Bank only allows cardholders to redeem for a Visa gift card in amounts from $25 to $500.

Store credit cards often limit reward redemption to store credit, enabling you to receive discounts on purchases from that particular merchant. The actual redemption process varies widely depending on the store.

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To maximize your credit card rewards, consider using multiple cards in your rotation. This can add a level of complication, but it also makes it easier to maximize rewards, as seen with the Citi Double Cash Card and the Chase Freedom Flex Card combination.

You don't have to stop at two cards, though. Examine your budget and goals to figure out the combination that works best for you. For example, a store-specific rewards card can earn you discounts for shopping at your favorite retailer.

It's also essential to remember your bonus categories, especially if you use multiple credit cards. This way, you won't miss out on higher return rates, like earning 5% at department stores with one card.

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Using multiple cards can add a level of complication, but it also makes it easier to maximize rewards. You can start by using one card for everyday purchases, such as the Citi Double Cash Card, which offers 2% cash back on all purchases.

This card earns 1% back when you buy and 1% back when you pay it off, making it a great option for daily expenses. For example, using the Citi Double Cash Card for all your groceries and household items can earn you a significant amount of cash back.

Adding a card like the Chase Freedom Flex can take your rewards game to the next level. It earns 5% cash back on up to $1,500 per quarter in rotating bonus categories, which can include things like gas stations, drugstores, and restaurants.

You can also consider a store-specific rewards card that earns you discounts for shopping at your favorite retailer, or a travel rewards card that helps you collect miles.

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Using multiple cards can add a level of complication, but it also makes it easier to maximize rewards. You can start by using one card for everyday purchases, such as the Citi Double Cash Card, which offers 2% cash back on all purchases.

To take it further, consider adding a card like the Chase Freedom Flex, which earns 5% cash back on up to $1,500 per quarter in rotating bonus categories. Don't miss out on the higher return rate, especially if one of your cards earns 5% at department stores and the others earn only 1%.

To get the most value, redeem your rewards in a way that aligns with your card's primary purpose. For example, if you have a travel card, it's usually best to redeem points or miles for travel-related perks. With Chase Sapphire Preferred, points are worth 1.25 cents apiece when used to book reservations through Chase Travel.

Redeeming rewards at retailers can often result in a weaker redemption value, but using a co-branded credit card can offer the best rates when making purchases from the corresponding brand. For instance, the Delta SkyMiles Gold American Express card offers the best rates when used to make purchases from Delta.

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Credit card rewards can be worth more or less depending on the redemption type, similar to how the value of one dollar changes with your travel destination.

The value of credit card points can vary greatly depending on the redemption program, such as Citi's ThankYou points, which are worth 0.8 cent each when redeemed for cash at Walmart.

Redemption values can also change when transferring points to airline or hotel partners, like Chase Ultimate Rewards, which are worth 2.8 cents per point when transferred to World of Hyatt.

It's essential to check the value of credit card points before redeeming, as it can make a big difference in the value you receive.

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You only need to account for credit card rewards you receive without spending any money, such as referral bonuses and initial bonuses with no spending requirement.

These types of rewards are considered taxable income by the IRS, so you'll need to keep records of them.

Managing rewards requires some effort, but it's worth it to maximize what you earn. Most credit card programs don't impose expiration dates on rewards you earn while your account remains in good standing.

Make sure to check your card's terms, as there are exceptions. You should also track one-time or yearly perks, such as a free night at a hotel, complimentary streaming-service subscriptions, or shopping credits at select retailers.

Annual fee amounts and their renewal dates are also important to monitor. If you rarely use a card, your issuer may lower your credit limit or close the card if you don't use it much.

Many credit card issuers have apps and online dashboards where you can track rewards and view your benefits. You can also use third-party apps, such as those from AwardWallet, MaxRewards, CardPointers, and The Points Guy, to monitor your rewards.

Some people prefer a more traditional approach to tracking rewards, using a spreadsheet to stay on top of perks, annual fees, and more.

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