Rules for deferral of income from gift card sales clarified

The IRS issued guidance clarifying that taxpayers that sell gift cards can defer recognizing income from the sale of gift cards redeemable by an unrelated third party until the year after the payment is received (Rev. Proc. 2013-29, clarifying and modifying Rev. Proc. 2011-18).

With the rapid growth in the use of gift cards in recent years and the increasing variety of ways in which they are sold and redeemed, the IRS has been issuing guidance to address tax accounting issues regarding recognition of revenue and expenses related to gift cards and gift certificates.

Revenue from sales of gift cards is not recognized immediately for financial reporting purposes and may also be deferred for tax purposes. Under the new rule, if a gift card is redeemable by an entity whose financial results are not included in the taxpayer’s applicable financial statement (as defined in Rev. Proc. 2004-34, §4.06), the taxpayer recognizes in income payment for a gift card to the extent the gift card is redeemed during the tax year. For a taxpayer without an applicable financial statement, if a gift card is redeemable by an entity whose financial results are not included in the taxpayer’s financial statement, a payment for a gift card is treated as earned by the taxpayer to the extent the gift card is redeemed by the entity during the tax year. Any payment the taxpayer receives that is not recognized in income in the year of receipt must be recognized the next year.

Because the rule as it was originally drafted in Rev. Proc. 2011-18 appeared to apply only to gift cards that were redeemable by related parties, this clarification was necessary to permit deferral in cases where the cards were redeemable by an unrelated entity. The new rule applies to tax years ending on or after Dec. 31, 2010.

  Rev. Proc. 2013-29

By Sally P. Schreiber, J.D., a JofA senior editor.