Best Practices for Accounting and Tax Implications of Gift Cards Sold by Retailers and Brands

Gift cards are a staple for both brick-and-mortar retailers and e-commerce brands. As a convenient and flexible option for consumers, gift cards can boost sales, attract new customers, and foster loyalty — regardless of whether a company sells through physical stores, online channels, or a combination of both. However, gift card programs also introduce complex accounting and tax considerations, especially related to revenue recognition, product returns, unused cards (breakage), and compliance with various regulations. Accurate treatment of gift card transactions is essential for transparent financial reporting and mitigating tax risks. This article outlines best practices for managing the accounting and tax implications of gift cards for retailers and brands operating in today’s omnichannel landscape, and how the CBIZ Consumer Products team can help you navigate these challenges.

Recognizing Revenue from Gift Card Sales

When a retailer or brand sells a gift card online, at a store counter, or through third-party channels, it receives cash upfront but has not yet delivered goods or services. Both U.S. GAAP and IFRS require that revenue from gift card sales not be recognized at the time of sale. Instead, the company should record a liability (“deferred revenue” or “unearned revenue”) until the card is redeemed.

Best Practices

• Record the initial gift card sale as a liability, not revenue.
• Recognize revenue only when the gift card is redeemed for goods or services.
• Keep detailed records of gift card issuance and redemption to ensure accuracy in financial statements.

How CBIZ Can Help

CBIZ’s Consumer Products team can assess your current gift card accounting practices, design tailored processes for revenue recognition and help implement systems to ensure ongoing compliance and accuracy.

Handling Returns Paid with Gift Cards

Returns are a routine aspect for retailers and brands. When items purchased with gift cards are returned, the typical best practice is to credit the value back to the original gift card or issue a new one—rather than a cash refund. This maintains outstanding liability until the gift card is eventually redeemed.

Best Practices

• Credit returns to the same gift card or provide a new gift card to the customer.
• Only reverse revenue recognition if the returned item causes the redemption itself to be reversed.
• Clearly communicate your return policy regarding gift cards to customers, regardless of sales channel.

How CBIZ Can Help

The CBIZ team can help you develop clear, consistent policies for gift card returns that align with accounting standards and enhance the customer experience, while maintaining control over your liability accounts.

Accounting for Unused Gift Cards (Breakage)

The percentage of gift cards sold are never fully redeemed. This unredeemed amount, known as “breakage,” can be recognized as income if it is deemed remote that redemption will occur and if it can be reliably estimated — see ASC 606 (U.S. GAAP) and IFRS 15.

Best Practices

• Use historical data to estimate breakage rates for your program.
• Recognize breakage proportionally as cards are redeemed, unless local law requires unredeemed funds to be remitted to the state (see unclaimed property rules, below).
• Regularly review and adjust breakage estimates as redemption trends and regulations change.

How CBIZ Can Help

CBIZ consultants will analyze your redemption data, help you model breakage rates, and guide you in recognizing breakage income in accordance with accounting rules and legal requirements.

Navigating State Unclaimed Property Laws

In the U.S., unclaimed property laws may require retailers and brands to remit unused gift card balances to the state after a set period. These rules can differ by state and sometimes by sales channel.

Best Practices

• Track the jurisdiction of each gift card sale to determine which unclaimed property laws apply.
• Maintain comprehensive records to support compliance and timely remittance of unclaimed property.
• Consult a the CBIZ Unclaimed Property team expert on state-specific requirements and regulatory changes.

How CBIZ Can Help

CBIZ’s unclaimed property team can keep you informed of evolving unclaimed property laws, amnesty programs, and enforcement efforts; help track gift card balances by jurisdiction; and assist with state filings to ensure full compliance and minimize risk.

Tax Implications of Gift Card Sales

Gift card transactions create specific tax questions. Generally, the taxation of income aligns with revenue recognition for accounting purposes: income is recognized when the card is redeemed, unless breakage is recognized. However, this is not always the case.

Best Practices

• Defer taxable income recognition until the gift card is redeemed, unless breakage is recognized and not subject to unclaimed property laws.
• Include breakage as taxable income when it is recognized for accounting purposes.
• Keep lines open with your tax advisors to ensure compliance with all local and federal regulations.
• Be aware that some jurisdictions may tax the initial sale of the card, especially for certain retail channels.

How CBIZ Can Help

The tax specialists at CBIZ can provide guidance to ensure your gift card program’s tax treatment matches revenue recognition, help you navigate multi-jurisdictional rules, and identify opportunities to optimize your tax position.

Gift Card Program Design and Internal Controls

Brands and retailers should implement strong controls to prevent fraud, ensure compliance, and maintain accurate reporting.

Best Practices

• Use systems that reliably track all aspects of gift card activity, from issuance and redemption to returns and expiration.
• Protect your program from fraud by using secure codes, regularly monitoring for suspicious activity, and promptly investigating anomalies.
• Establish clear expiration policies, following state and federal rules (e.g., the CARD Act prohibits expiration dates under five years).
• Routinely audit gift card-related accounts for accuracy.

How CBIZ Can Help

CBIZ can review your internal controls, help set up secure tracking systems, and perform periodic audits to support financial integrity and safeguard against fraud.

Disclosures and Financial Reporting

Transparent disclosures about your gift card program are essential in your financial statements for both stakeholders and auditors.

Best Practices

• Disclose policies on gift card accounting, revenue recognition, breakage, and escheatment in the footnotes of your financial statements.
• Clearly report deferred revenue and recognized breakage in your balance sheet and income statement.
• Ensure auditors and stakeholders have access to comprehensive, well-organized supporting records.

How CBIZ Can Help

CBIZ can assist in drafting clear disclosures and organizing your financial reporting process, ensuring transparency and accuracy for all stakeholders.

Conclusion

Gift cards are vital revenue and loyalty drivers for brands and retailers, whether sold through retail stores, online platforms, or omnichannel strategies. However, successful programs hinge on careful management of accounting and tax implications, including revenue recognition, returns, breakage, state unclaimed property law compliance, and robust operational controls. By following best practices in these areas — and with the consultative support of the CBIZ Consumer Products team —retailers and brands can maximize the benefits of their gift card programs and reduce compliance risks.

The CBIZ Consumer Products team brings deep industry expertise and up-to-date regulatory knowledge. We help clients stay compliant, design and maintain effective gift card programs, and optimize accounting and tax strategies for long-term growth and success. To learn how we can support your business, reach out to CBIZ today.