Before we know it, the holiday season is just around the corner. A lot of businesses are ordering stock, scheduling staff, and doing everything necessary around this time of the year to get ready before the shopping spree starts. Among all the available gift items, gift cards are gaining popularity since they are so easy to use. No one has to worry about color and size, and no more long lines for exchanges or refunds after the holiday season. No wonder gift cards are offered by virtually every type of business these days from department stores to restaurants to drug stores.

While gift cards are appealing and worry-free to the shoppers, have you, as a business owner, ever thought about the proper tax treatment of these gift card sales receipts? Do you have a sound accounting system to keep track of all information necessary to decide the correct period in which the income should be reported?
Regulations were established back in the 70s to deal with the income issue of advance payments received by business owners. With the exponential increase in gift card sales nationwide, the Internal Revenue Service has been scrutinizing the tax treatment of gift card sales by retailers in recent years.

In general, gift card sales receipts that are not previously included in income by an accrual-basis retailer should be included as income by the last day of the second tax year following the year of sales. There is an information-reporting requirement on such advance payment receipts with the filing of income tax return. Taxpayers who have not been treating their gift card sales receipts correctly but wish to do so can apply for a change in accounting method with the IRS. In such cases, prior IRS consent is required. Starting with years ending on or after December 31, 2003, taxpayers can obtain automatic consent from the IRS for a change of accounting method regarding advance payment receipts if they elect to include such receipts in income one year after the year of sales.

No matter which method a taxpayer chooses, a sound record-keeping system is a key. A retailer should be able to track when each gift card is sold and redeemed. Reports should be generated periodically and crosschecked with accounting records to ensure that income has been accounted for in the proper period. Fortunately with computer technology, such a task is just a button away. Now, are you ready for the shopping season?

Circular 230 Disclaimer: This article represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. Any tax information contained in the body of this article was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

About the Author

So Sum Lee, CPA, PrincipalSo Sum Lee
Tax, Real Estate, Technology, Hospitality
So Sum Lee, CPA is a Tax Principal at KROST. So Sum has over 18 years of experience in public accounting and has a wide range of experience in Taxation, as well as servicing high-net-worth clients. So Sum’s area of expertise includes industries such as wholesale, Real Estate investments, and Restaurants. » Full Bio