The Internal Revenue Service has issued a revenue procedure that clarifies the rules for when a company uses the deferral method of accounting for advance payments that are received by the taxpayer for the sale of gift cards that are redeemable by an unrelated entity.
Revenue Procedure 2013-29 spells out what happens when a gift card is redeemable by an entity whose financial results are not included in the taxpayer’s applicable financial statement, so the taxpayer should then recognize the payment in income to the extent the gift card is redeemed. For a taxpayer without an applicable financial statement, the taxpayer will recognize the payment in income when it is earned, which, in this situation, is when the gift card is redeemed.
Any payment received by the taxpayer that is not recognized in income in the year of receipt must be recognized in the subsequent year.
Rev. Proc. 2013-29 modifies and clarifies Rev. Proc. 2011-18, 2011-5 I.R.B. 443. The Treasury Department and the IRS have concluded that a taxpayer should not be precluded from using the deferral method of accounting provided in section 5.02 of Rev. Proc. 2004-34 solely because the taxpayer never recognizes in revenues in its applicable financial statement payments from an eligible gift card sale, or, for taxpayers without an applicable financial statement, never earns payments from an eligible gift card sale.
The revenue procedure will be published in Internal Revenue Bulletin 2013-33 on Aug. 12, 2013.