The Internal Revenue Service had a nice gift in the post-holiday season for retailers: extra flexibility in the accounting for gift card redemptions.
Revenue Procedure 2011-18 extends the advance payment deferral method of accounting of Rev. Proc. 2004-34, 2004-1 C.B. 991, to accrual method taxpayers who sell gift cards that may be redeemed by another entity under a gift card service agreement. Rev. Proc. 2011-18 allows a taxpayer to apply the deferral method to a sale of a gift card (or gift certificate) if the taxpayer is primarily liable to the customer (or holder of the gift card) for the value of the card until redemption or expiration, and if the gift card is redeemable by the taxpayer or by any other entity that is legally obligated to the taxpayer to accept the gift card from a customer as payment.
The new rules help retailers deal with gift cards that are sold and redeemed in different tax years, according to Bloomberg.com. Retailers that sell gift cards under different brands and subsidiaries will be able to defer income from gift cards, as well as cross-selling gift cards without immediately reporting the taxable income.
Franchise owners will be able to market gift cards that can be redeemed at similar franchises while deferring the taxable income under the new rules, and retailers will be able to defer taxable income when they provide gift cards as refunds for items returned by consumers.
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