IRS Issues Advice on Deferring Gift Card Income
In a March 4 technical advice memorandum (TAM), the IRS has concluded that a company can defer the recognition of advance payment income received from the sale of unredeemed gift cards that are redeemable for goods or services for up to two years, according to a recent report in AccountingWeb.
“The IRS has previously issued other directives and field advice discussing revenue recognition procedures related to gift card sales, which should be taken into consideration when reviewing this most recent TAM from the IRS,” notes Elish A. Meyers, legal counsel for the Retail Gift Card Association. “Very generally, income from the sale of gift cards is reported to the IRS in the year it is sold. However, under certain conditions, companies may defer recognizing income received from the sale of gift cards to a future tax year. This is an important topic to the gift card industry as most companies see their largest gift card sales occur over the holiday time at the end of the year,” she explains. “Historically, the majority of the gift cards sold are not actually redeemed until after the holidays start winding down, which can result in a significant income event in one year but without the off-set of redemptions until the next year. By having the ability to defer the income for gift cards sold, but not yet redeemed, to a future taxable year allows time for a large majority of redemptions to occur from the holiday gift card sales and other sales during the year.”
This most recent TAM from the IRS further expands on the circumstances under which a company may defer income from gift card sales, an election which is already heavily conditioned and has many caveats, Meyers adds. She cautions retailers to consult tax or accounting professionals since each company’s current accounting methods, company structure, fiscal year and other business practices are specifically relevant as to the election to defer gift card income and its availability.
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