Gift Cards – New Guidance on Deferral of Income
Gift cards and gift certificates have an appealing feature that makes the desirable to both givers and receivers – convenience. Nowadays, may gift cards are not limited to a specific retailer: some gift cards are accepted by multiple merchants. Under prior law and guidance, revenue from the gift card sales was recognized in the tax year of the receipt: however, under regulation as modified and clarified by a series of revenue procedures, such revenue may be deferred in certain situations.
In July, 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 12/31/10.
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 cards 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.
Rev. Proc, 2013-29 modified 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 revenue 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 the maximum one-year deferral.
Record keeping becomes very important. Taxpayers need to be able to track the sale and redemption of each gift card to take advantage of these revenue procedures.
Michigan has an unclaimed property act. If the gift cards meet certain criteria and have not been redeemed, the value of the card may have to be remitted to the State. Should you have questions regarding gift cards you issue, please call your Shindel Rock professional.