Tax Considerations for Gift Card SalesJanuary 23, 2020
Restaurant owners, are you complying with all of your obligations when it comes to gift card sales? Here’s what you need to know.
Attention restaurant owners…have you read our article Restaurant Owners, Are You Accounting for Gift Cards Correctly? You’ll want to check it out! For part two of this blog series, we will dive into the tax rules surrounding gift card sales (a potential area of scrutiny with the IRS and states).
Some helpful background
When a business issues a gift card, they have received an advance payment for the obligation to provide goods or services at a future time.
What are the tax rules?
For federal income tax purposes, revenue from the sale of a gift card is typically recognized when it’s earned, due or collected (whichever comes first). Hence, the general rule is that revenue from gift card sales is recognized in taxable income not when it’s redeemed, but when it’s sold.
Are there exceptions to this?
Yes – a one year deferral may be available for accrual based taxpayers - As outlined in Revenue Procedure 2004-34, the one year deferral method is allowed to enable a taxpayer to defer advance payments (goods, services, gift cards etc.) from the year they are received to the subsequent year provided there is a method to determine the portion not yet earned.
A two year deferral exception may also be available - However, the two year exception requires that the gift certificates are primarily redeemed for inventoried goods which would not typically apply to restaurants.
What happens with unclaimed gift cards?
If a certain amount of time goes by and a gift card is not redeemed, many states will require companies to turn over a portion or all of their value. Massachusetts gift cards, for example, must state the date of issuance and expiration and must be valid for at least seven years. If those requirements are met, the company can keep the unredeemed value upon expiration. Currently, Rhode Island has proposed legislation to require escrow accounts for unredeemed value.
Key tasks for restaurant owners
Restaurant and retail owners should take specific action steps to mitigate potential exposure, which includes:
- Confirm compliance with state laws.
- Review the level of information obtained and retained on gift cards sold.
- If potential issues are identified, consider establishing new policies and procedures
With the holidays behind us, you likely have many gift card sales to account for. Questions on the tax rules for gift cards? Reach out to us.