In response to the rapid growth of gift card sales and the variety of ways in which they are sold and redeemed, the IRS has been issuing guidance to address accounting issues associated with such sales. Most recently, the IRS issued Rev. Proc. 2013-29, which addresses the tax treatment of gift cards sold by one entity and redeemable by an unrelated entity. Prior to the issuance of Rev. Proc. 2013-29, if a taxpayer sold gift cards redeemable by an unrelated entity, the taxpayer would recognize as income the full value of the gift cards in the year of sale. The new guidance, however, allows a taxpayer to sell gift cards in one year, and in some circumstances, delay recognizing income from those sales until the subsequent year.
Under Rev. Proc. 2013-29, which modifies and clarifies Rev. Proc. 2011-18 and Rev. Proc. 2004-34, if a gift card is redeemable by an entity whose financial results are not included in the taxpayer’s applicable financial statement, the taxpayer only has to recognize the payment for the gift card in its income to the extent the gift card is redeemed during the tax year. Any payment received by a taxpayer that is not recognized in income in the year of receipt, must be recognized in the subsequent year. This is particularly relevant in the franchise context, because often one franchisee will sell a gift card, but the consumer will redeem the gift card at a different franchisee’s location. In addition, the new guidance would also apply to a franchisor who sells gift cards from its website for redemption at franchisee locations. If you have questions or would like more information related to the new guidance, contact a member of Greensfelder’s franchise and distribution team or its tax team.