The American Institute of CPAs has recommended a modification to Internal Revenue Service guidance that governs the treatment of retail gift cards when the issuance and redemption of a card is handled by financially unrelated entities.

In the past, gift card programs were largely self-contained, with the owner of a retail brand responsible for both the sale and redemption of a card. But it has become increasingly common for retailers and other entities to participate in clearinghouses for card programs, with the settling of proceeds governed by service agreements.

Under current IRS rules, however, an issue arises regarding eligibility for the deferral method when redemption involves two entities with unconsolidated financial results.

“(I)f the redeeming entity is financially unrelated to the issuing entity, the issuing entity will never recognize any of the revenue from a gift card receipt (in whole or in part) in revenues in its applicable financial statement, because that revenue is accounted for solely by the unrelated redeeming entity upon the sale of the merchandise or services,” AICPA Tax Executive Committee chair Patricia Thompson wrote in a comment letter Wednesday to the IRS.

To correct the problem, the AICPA suggested the IRS add the following language to the relevant revenue procedure:  “(A) taxpayer that sells gift cards that are redeemable by entities whose financial results are not included in the taxpayer’s applicable financial statement (as determined without regard to this section), will be treated as not having an applicable financial statement with respect to gift cards that are actually redeemed by unrelated entities or, for administrative convenience if the taxpayer so elects, with respect to all such gift card sales. Further, the taxable year in which a gift card is redeemed will be treated for this purpose as the tax year in which the gift card is earned.”

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