"How does GAAP accounting treat credit card rewards received?
Can someone explain the proper accounting treatment for these rewards?"
Credit card rewards received are considered non-cash operating expenses and should be recognized at their fair value in the period in which they are earned.
[Source: AICPA's Accounting Standards Updates Guide]
The fair value of credit card rewards is usually the estimated amount the rewards will cost the company in the future.
Companies are required to capitalize the cost of credit card rewards at the time they are redeemed by employees.
Companies must also disclose the amount of rewards liability recorded and the estimated cost of rewards that have been earned but not yet redeemed.
According to the IRS, credit card rewards earned through the use of the card, such as cashback bonuses, are viewed as a rebate and not taxable income.
Rewards provided as an incentive just for opening an account are also viewed as a rebate and not taxable income.
The IRS requires companies to recognize revenue at the time of the initial sale and accrue the estimated costs of customer award credits from loyalty or reward programs.
Under the incremental cost method, entities recognize revenue at the time of the initial sale and accrue the estimated costs of customer award credits from loyalty or reward programs.
The new revenue standard affects retail and customer loyalty or reward programs, requiring entities to change how they account for these programs.
According to a study by Marcum, credit card rewards can be a valuable tool for organizations to manage costs, but the accounting and tax implications can be complex.
According to QuickBooks, credit card rewards can be accounted for by recording them in the "Other Income" or "Credit Card Credit" sections of accounting software.
Personal credit cards only require accounting for credit card rewards if received without having to pay taxes.