How do I categorize bank dividends and cash back rewards?
rudykro
Member Posts: 1
I have checking account dividends deposited into my checking and I'm not sure how to properly categorize this. I also have the same issue with my credit card issuing cash back rewards which appears as a credit. Does anyone know how to do this? Thanks!
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@rudykro,
Dividends received from banking accounts should be classified as Interest Income on the income statement. Cash Back rewards typically get coded to reduce the expense that created the reward. For my clients, I typically post rewards as a refund of expense where most of the charges are categorized. So for example, if most of the credit card charges relate to computer subscriptions, then I would post the reward as a Refund of Dues and Subscriptions.
Hope that helps
I agree with Mike G. about bank dividends, but not the cash back credits. I believe there are 2 potential options for cash back awards.
1.) If the credit appearing on your statement is clearly associated with a specific charge, that means the credit is from the vendor and not the credit card issuer. In that event, you should record the credit against whatever expense account the original charge posted to.
2.) If the credit is from the card issuer it should be recorded as non-operating income and be carried into the business's tax filing as such. One of my clients routinely transferred the accumulated awards cash balance from his business credit card to his business bank account and used them as any other cash deposit.
I've chosen to have my personal credit cards cut me a check when my rewards balance passes my pre-established threshold, though I don't know if that's possible with business accounts.
Respectfully disagree with your assessment of the treatment of cash back rewards under item 2. Do a google search and you will see that cash back rewards are not taxable income. Neither for individuals or businesses. They are treated as rebates (reduction in purchase price) See Publication 525. Not that it can be relied upon as a tax position, but PLR 1027015 linked here https://www.irs.gov/pub/irs-wd/1027015.pdf also concludes that cash back rewards do not meet the definition of gross income under IRC 61.
Mike G,
Thanks for sending the link to the IRS ruling. However, a careful reading of the piece will show that it doesn't refute my position.
"Section 61 provides that gross income means all income from whatever source derived. 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."
The bolded section refers to the type of transactions I mentioned in my first example. The first sentence of the quote actually affirms the argument I presented in my second example.
So what is the account that this transaction would be categorized under?