BGBC Partners, LLP Tax Update: Update on Unredeemed Gift Cards
As a store owner, you are aware that gift cards can be great for your customers and therefore great for your store. According to a study conducted by consulting firm CEB, consumers spent over $130 billion on gift cards, while close to $1 billion remained unused.
In a Tax Update column during the holiday season last year, we discussed the general rules pertaining to unredeemed gift cards. Since that time, the IRS has issued new guidance relating to gift cards.
How does this new guidance affect your store’s gift card program? That is the topic of this week’s Tax Update.
The IRS takes the position that gift cards are treated as “advanced payments”, which are generally recognized as taxable income in the year the cash is received from the customer. Without relief, this rule might discourage retailers and stores from selling gift cards.
The IRS recently issued new guidance in TAM 201610017 which states that a company can defer income, for up to two years, from the sale of unredeemed gift cards for goods and delivery services to the extent it can appropriately estimate the amounts that are deferrable. For example, if a customer purchases goods from your store, and wants to have the goods delivered to their home or place of business, the cost you charge for the delivery service can also be placed on the card and can be deferred for up to two years.
In Revenue Procedure 2011-18, the IRS stated that unredeemed gift cards may be deferred if the following conditions are met:
(1) The taxpayer is primarily liable to customer (or gift card holder) until redemption or expiration
(2) The gift card is redeemable by the taxpayer or by any other entity that is legally obligated to the taxpayer to accept gift cards from the customer as payment.
The general deferral period is one year, however, the two-year period may apply under certain conditions. These rules can be very complex and fact-specific.
In general, we wanted to make you aware of this new guidance which also includes services such as delivery services as items deferrable for up to two years under a gift card program.
As you can see, these rules are tricky and are stated in various regulations and rulings. If you are thinking of initiating a gift card program, or have a gift card program in place, but are unsure if you are complying with the tax laws, we recommend that you consult with a qualified CPA.
What we don’t want to do is to give the IRS the free-gift of paying your taxes sooner than you needed to!
BGBC Partners, LLP is a full service certified public accounting and business consulting practice.
For more information, contact Brad Bell, CPA or Steve Reed, CPA/ABV/CFF at BGBC Partners, LLP (317-633-4700).