My Thoughts & Questions For Your Accountant On Those 1099’s
A few weeks ago people started getting 1099’s in the mail from American Express and Chase. These were based off of credit card referrals. If you referred a friend, or yourself, and received a points bonus for it then you should have received a 1099 for it. Most of the points were valued at 1 cent a piece, besides Hilton points. I am NOT an accountant or a tax professional but I have some thoughts on it. I also spoke with someone who is more in the know on these things. This piece is intended to give you some ideas of topics to speak with your tax professional about. This IS NOT tax advice, you still need to discuss this with a professional.
My Thoughts & Questions
I brought this situation up to someone who knows a lot more about the tax code than I do. The first question I was asked is which box was filled out on the 1099. If you look at the ones you received you will see that box 3 is filled out. I had assumed these would be treated like bank bonuses which are in box 1 on a 1099-INT. My friend seemed pleased that the items were in box 3 on the 1009-MISC. Here is some info on what usually ends up in box 3 and why it is taxed less than regular income.
When I asked my friend why they thought these would be coming out now they said that the IRS is putting the screws to banks and credit card issuers. There was little to no 1099 filing previously because it was hard to value some points. The IRS seems no longer willing to overlook these.
My friend also said if they are transferable or can be converted into cash they require 1099 reporting. I followed that up with a question of my own. If they are not transferable or convertible to cash should they be claimed? My friend said that if they are transferable even though you can’t turn them into cash they are still taxable.
Questions This Raises
So these are the questions I plan to ask my accountant when filing my taxes:
- Should I claim non transferable currencies I received a 1099-MISC for like airline miles?
- Should I go with the 1 cent per point valuation on a currency like Membership Rewards or should I claim their cash value of $0.50 a piece? Ultimate Rewards have a 1 cent cash value so those would be reported as such.
- If there was an annual fee on the card that I received the 1099-MISC on can I write it off since I am being taxed on some of the points earning?
Conclusion
I hope this gives you some ideas of what to discuss with your tax professional when filing your 2018 taxes. Remember that this is not tax advice but rather me sharing my thoughts and the questions I plan on asking my accountant.
I still believe that these were sent out for referrals and not welcome bonuses or points earning from spend because they did not result from spend on the credit card. I believe that, for the time being at least, welcome offers and points earned via spending are considered rebates and are overlooked. Hopefully it stays that way ;)!
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I think many bloggers have used their referral miles “income” tax free for many years and are lucky the IRS is not retroactively considering them to be income just like any other spendable currency received as commission…which is what these miles are. For an individual the impact maybe negligible since they might have self-referred or referred a friend or relative. For many bloggers it’s become a major income stream and the consequences are now finally coming home to roost. As to the value, be thankful the cc issuers are only using the penny a mile/point they likely buy miles/points at (the cost at least for airline miles that has been on the public record since programs started back in the 80s) vs the 3-cents we pay.
I’d be curious to see some of your fellow bloggers tell us how many of these reporting slips they’ve received from the major card issuers. I suspect some are in the thousands and crying the most.
I honestly don’t think that many of the larger bloggers use referrals much. It probably hits the smaller ones who use their personal referrals as a way to get some value out of writing free content since they aren’t large enough for ad revenue etc.
And the valuations sent out, if they were higher, don’t mean much since they could be disputed since the IRS cares more about their cash value. And see my comment about Hilton points above…it is pretty easy to show that Hilton values them at $0.004 a piece.
I got close to $2000 in referrals from friends, family, and mainly my wife and myself referring each other back and forth. It really isn’t difficult to do in a 2, 3, or 4 party system. So I think this affects a lot more people than just the bloggers. It stinks but you are still getting more value from the referral vs the tax bill so overall not a huge deal imo.
Man, ain’t that 0.67 cents valuation for Hilton a massive rip off.
I plan on discussing that with my accountant. I think I could value them at $0.004 and pass an audit since that is what they value them at on their website for points and cash bookings. But I have to see what he says about it.
My take on these: if you have not used, spent, redeemed, cashed out or transferred those points then this represents unearned income which will only become revenue if and when they are used (etc. per above).
As far as offsetting expenses; there are more besides annual fee: time spent on referrals (hourly pay rate), internet access fees (wifi), cost of computer (or depreciation of same) utilities and so on.
And who is valuing these points, and since the CC companies never informed users of this change in policy (sending 1099s) should there be some liability on there part?
I don’t think they would have any liability on their part since the mantra is coming from the IRS but that is just my thoughts on it.
Thanks for the follow-up post. I was also wondering what percentage of folks who referred got 1099s? Last year I did two true (not self) referrals for separate Amex cards and one for Chase and got no 1099s. I guess they could still arrive but they’d be late at this point. Anyone else get a referral bonus but no 1099?
Technically if the totals are under $600 companies don’t have to send a 1099 (but many still will) but you are supposed to still report it. I would chat with your accountant and see what they say about it though.
If you play the lottery and win something, can you write off your losing tickets (which you’ve saved, of course) against the winnings? Is so, seems you should be able to write off the AF against the points earned.
Good question – I would think you can since you can write off gambling losses in the casino vs your wins.