Here’s a CEO who spent 1.83 million American Express Membership Rewards points to cover a surprise tariff bill at the guitar pedal manufactuing company he runs in Oklahoma Cty. That’s how many points were required to offset the nearly $11,000 levy, paid with his credit card. American Express typically lets you spent points at 0.6 cents apiece for statement credits.

When a tariff bill for almost $11,000 arrived without warning, Robert Keeley reached for one of his last financial lifelines and cashed in 1.83 million American Express reward points to pay it.

“It’s like a needle pin holding back a crack in the dam,” said Keeley, who runs Keeley Electronics, a guitar-pedal manufacturer with 35 employees in Oklahoma City.

I have three reactions here.

1. Unexpected expenses wreak havoc on a business. They mean less global trade which means less economic growth, and no serious economist supports them in the manner being pursued by any government in the world (there are theoretical edge cases, rarely reflective of real world conditions, where some suggest particularly tailored tariffs could be beneficial).

2. This is an absolutely terrible redemption of Membership Rewards points. When you’re backed into a corner you’re forced to make bad decisions. I’d like to think I’d never redeem my seven figure balance of Membership Rewards points at just 1 cent apiece, let alone 3/5ths, but if you’re trying to save your business and have few options it’s something to consider.

3. It’s especially a shame because these were points from business spending that amount to untaxed funds, it’s converting personal funds for business use without any equity or debt in exchange, and the business doesn’t even get to write off the expense because they lowered the mount of the card payment due.

Let me explain why small business rewards are so valuable – it’s not just points from spending but de facto (if not de jure) it’s untaxed income from a business.

While not entirely on point to the situation of small business credit card spend-based rewards being converted to personal use, the general IRS guidance is (2002-18):

[T]he IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.

This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.

Formally, the IRS could say that a business’s rewards converted to personal use constitutes taxable income, that the business really shouldn’t be deducting the full amount of their purchase when there’s a rebate, or even potentially both depending on the form of the business.

As a practical matter doing the work to tie millions of small rebates and forcing businesses to adjust every deduction would be costlier than any extra tax collected. There would be an uproar on the part of business owners and, as a result, politicians. And remember that since the George W. Bush administration federal employees have been able to keep their miles from business travel – and that means IRS examiners, too!

That said, when you push the envelope and move beyond a vacation a year into structured and systematic use of a business to convert points at scale while avoiding taxes you’re forcing the IRS’s hand and taxpayers have lost.

Furthermore, resellers who don’t adjust the cost basis of their inventory for rebates are understating their income – though this is not something especially likely to be audited.

Meanwhile it’s such a strange time to try to protect American jobs when unemployment has been historically low and employment has shifted into higher value, higher paying sectors – although the labor market has softened since tariffs were announced. Stock markets have recovered, though, once the President removed the gun from our own economic head and because far we’ve kicked the can down the road towards re-imposition of the worst tariffs.

(HT: @crucker)