Academic journal article Journal of Accountancy

New Guidance on Gift Cards and Deferral of Income

Academic journal article Journal of Accountancy

New Guidance on Gift Cards and Deferral of Income

Article excerpt

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. …

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