Paul L. Caron

Tuesday, November 23, 2021

WSJ: AmEx Pitched Business Customers A Tax Break That Doesn’t Add Up

Wall Street Journal, AmEx Pitched Business Customers a Tax Break That Doesn’t Add Up:

AmExBusinesses were told they could deduct transaction fees while earning tax-free cash rewards.

The pitch went out to eye doctors, McDonald’s franchisees and payroll companies: “Reduce your taxable income burden to Uncle Sam.”

In phone calls, emails and in-person meetings with thousands of business owners, American Express salespeople laid out the strategy. Use AmEx to pay your employees and suppliers, they said. You’ll have to pay a fee, but you’ll come out ahead. That’s because you can earn rewards on the transaction that can be converted into untaxed cash, while also deducting the transaction fees for tax purposes.

The pitch helped AmEx bring in billions of dollars of transaction volume since at least 2018, according to people familiar with the matter and documents reviewed by The Wall Street Journal. But there was a problem: The strategy relied on a shaky interpretation of how tax law treats rewards points.

In July, a whistleblower filed a report with the Internal Revenue Service alleging that AmEx knowingly persuaded business owners to underreport their income and taxes.

This is “a big company encouraging tax wrongdoing,” said Gregory Lynam, co-founder of Lynam Knott, the law firm that filed the report on the whistleblower’s behalf. It “promotes a tax shelter that doesn’t work.”

AmEx, through a spokesman, acknowledged that some members of its U.S. sales organization “failed to uphold our values and had positioned certain products inappropriately, specifically with respect to tax benefits.”

AmEx discovered the pitch through internal channels, the spokesman said, and has hired a law firm to investigate. “This misconduct should not have happened,” he said.

AmEx has terminated, disciplined or retrained some employees, and compensation plans have been adjusted. “We will take further action if appropriate,” the spokesman said. ...

Sales employees flagged concerns to senior sales staff, human resources and the company’s ethics portal after business owners and their accountants questioned the tax advice, the people familiar with the matter said. They pointed to IRS guidance that says rewards points accrued from business expenses that are converted to cash aren’t necessarily tax-free, contrary to the sales pitch. ...

Business owners were told that they could deduct those fees from their businesses’ taxable income as ordinary expenses, the people said. The strategy had another benefit, business owners were told: They could earn reward points and could convert them into untaxed cash using the AmEx Platinum Charles Schwab card, the people said. ...

Here’s how the tax math was described in an AmEx document viewed by the Journal: A business owner would use AmEx’s wire services to send $10 million for a 1.77% fee—or $177,000. Assuming the business owner would pay a 42% combined federal and state marginal income-tax rate, the owner would deduct the fee for a $74,340 reduction in taxes, lowering the transaction’s net cost to $102,660.

The business owner would also earn one point per dollar spent, or 10 million points. The owner could then transfer the points to a personal AmEx Platinum Charles Schwab card at 1.25 cents per point, generating a cash reward of $125,000. Subtract the net transaction cost of $102,660 for a gain of $22,340. ...

But the strategy works only if the business deduction is allowed in full and if the income from the rewards points isn’t considered taxable. Otherwise, the cost of the transaction would exceed the tax benefits.

Rewards points generally aren’t considered income for individuals who generate them when they make personal purchases. Instead, they are viewed as a discount on purchases. It is less clear-cut when there is a separation between the entity earning the reward—the business—and the individual receiving the awards.

In guidance released in 2002, the IRS said that it wouldn’t challenge taxpayers who redeem miles earned from business travel for personal use but said that protection didn’t apply to cash conversions. The IRS has pursued taxpayers through audits in special cases involving rewards, and cash bonuses for opening bank accounts are now considered taxable income.

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