One-Year or Two-Year Deferrals: Gift Card Tax Rules

Written by Ross Mendheim, CPA

What do you get for that hard-to-buy-for relative on their birthday?  Or, what do you give a client to show your appreciation for his/her business?  Gift cards.  You can buy gift cards just about anywhere anymore.  They have become such a staple in society that you would be hard-pressed to find a business in the retail service arena that doesn’t sell them.  But, if you are that business, are you deferring the tax earned on those gift cards or certificates to the correct taxable year?

Generally, advanced payments for goods are included in taxable income in the year they are received, even if you defer a portion of the income for financial reporting purposes. But, there are exceptions to that rule.  What if the advanced payment is for goods and services?  If the advanced payment is for both goods and services, then a two-year deferral may be available.  Services can be classified as integral or non-integral.  Integral services are integrally related to the sale of goods, such as the repair, installation or delivery of goods held in inventory. Non-integral services are services that are unrelated to the sale of goods.  Examples are things like automotive repair, photography services or travel-related services which do not rely on specific goods.  Depending on how your goods and services are categorized, determines how much of the income qualifies for the extended two-year deferral.

Oftentimes, businesses assume that they do not qualify for the extended two-year deferral.  However, your BMSS tax professional can review your current gift card agreements and advise you on whether you can qualify for the two-year deferral or how your agreements might be amended going forward in order to qualify for this deferral.  Reviewing your gift card tax planning should be completed annually to address any adjustments that need to be made.

If you would like more information about your tax deferral options, please contact your BMSS tax professional at (205) 982-5500 or go to bmss.com.  Our tax group can provide you with up-to-date information on this and other tax issues you may be facing.