The IRS has modified 2011 guidance allowing taxpayers that sell gift cards redeemable for goods or services by an unrelated entity to defer income on those sales. Rev. Proc. 2013-29 modifies Rev. Proc. 2011-18.

Background

Rev. Proc. 2004-34 provides a deferral method of accounting that allows an accrual method taxpayer receiving advance payments for goods or services to defer recognizing income to the extent the taxpayer defers recognizing the payments as revenues in its applicable financial statement. If the taxpayer does not include advance payments as revenues in its applicable financial statement in the year of receipt, the taxpayer must include the advance payments in gross income in the next succeeding tax year.

The IRS subsequently modified and clarified Rev. Proc. 2004-34 in Rev. Proc. 2011-18. The IRS determined that a taxpayer should not be precluded from using the deferral method of accounting solely because the taxpayer never recognizes in revenues in its applicable financial statement payments from an eligible gift card sale, or, for a taxpayer without an applicable financial statement, never earns payments from an eligible gift card sale.

Comment: The IRS observed that how retailers market, sell and redeem gift cards continues to evolve. Today, gift cards are commonly sold by one retailer and redeemed either by that retailer or by others (related or unrelated to the selling entity) under a gift card service agreement.

Modification

If a gift card is redeemable by an entity whose financial results are not included in the taxpayer’s financial statement, the payment will be treated as recognized by the taxpayer in revenues in its financial statement to the extent the gift card is redeemed by the entity during the tax year. In the case of a taxpayer without a financial statement, the payment will be treated as earned by the taxpayer to the extent the card is redeemed by the entity during the tax year.

Audit protection

In Rev. Proc. 2011-18, the IRS provided audit, Appeals and Tax Court litigation protection to taxpayers for tax years ending before December 31, 2010. The modification in Rev. Proc. 2013-29 is eligible for audit protection to the extent provided in Rev. Proc. 2011-18.

Effective date

Rev. Proc. 2011-18 is effective for tax years ending on or after December 31, 2010. The modification in Rev. Proc. 2013-29 is effective as of the same date.

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