Gift cards and gift certificates have an appealing feature that makes them desirable to both givers and receivers—convenience. Nowadays, many gift cards are not limited to a specific retailer; some gift cards are accepted by multiple merchants. Under prior law and guidance, revenue from gift card sales was recognized in the tax year of receipt; however, under regulations as modified and clarified by a series of revenue procedures, such revenue may be deferred in certain situations.
On July 24, 2013, the IRS issued Rev. Proc. 2013-29, which allows taxpayers to defer income from the sale of gift cards or gift certificates redeemable by an unrelated entity until the cards or certificates are redeemed for goods and services by that entity. This modification is effective for tax years ending on or after Dec. 31, 2010.
For tax purposes, gift card and gift certificate sales are viewed as advance payments for goods and services. Rev. Proc. 2011-18 allows taxpayers to use the deferral method for eligible gift card sales that are redeemable by another entity. For the gift card sale to be eligible for the deferral method, the taxpayer must be primarily liable for the card’s value until it is fully redeemed or reaches expiration. The gift card must also be redeemable by the taxpayer or another entity legally obligated to accept it as payment for goods and services.
Revenue recognition becomes more complicated when an unrelated taxpayer may also redeem a gift card’s value. An unrelated entity is an entity whose financial statements are not consolidated with the taxpayer’s applicable financial statement (Rev. Proc. 2013-29, §2.04). If the gift card is redeemed by an unrelated entity, the revenue is earned and recognized by the unrelated entity upon the sale of goods or services. Under these revenue deferral provisions, there may be times when the taxpayer may not recognize income in its financial statements from the sale of gift cards redeemed by an unrelated entity.
Accordingly, Rev. Proc. 2013-29 modifies and clarifies the existing rules promulgated under Rev. Proc. 2011-18 to provide that for gift card sales redeemable by an unrelated entity, sales are earned and recognized as revenue in the taxpayer’s applicable financial statement when the gift card is redeemed. Taxpayers without applicable financial statements earn revenues to the extent the gift card is redeemed by the entity during the tax year. However, gift card sales redeemable by the taxpayer or related entities are still subject to a maximum one-year deferral.
For a detailed discussion of the issues in this area, see “Deferral of Income From Sales of Gift Cards,” by Maribeth Quilao, CPA, in the November 2013 issue of The Tax Adviser.
Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following topics in the November 2013 issue of The Tax Adviser:
- The application of the Sec. 179 limitation to S corporations in a controlled group.
- The IRS’s oversight of valuation professionals.
- Issues involved with treating partners as employees.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends, and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or email firstname.lastname@example.org for a subscription to the magazine or to become a member of the Tax Section.