Gift Card Taxation
By: David Zlotnick, CPA
I would like to share with you an article put out by PizzaMarketPlace.com. The article discusses the use of gift cards by restaurants to promote the restaurant, bring in new customers and generally to increase revenues of the restaurant.
Gift cards provide benefits to the participating restaurants such as business promotion and new customer introductions but also increase the restaurants cash flow by the timing differences between when the card is sold and when it is redeemed. The recognition of income for income tax purposes and New Mexico Gross Receipts Taxes can possibly create some accounting and record keeping problems.
Gift cards are different from ordinary sales in that when the gift card is issued and sold is not typically when the food and services are provided. A gift card can be purchased by a party and gifted to another who may not use the card for some period of time after the original sale. Say $10,000 worth of gift cards are issued December 28, 2009 and not redeemed until January, February, March and April of 2010. Generally the sale is recognized when the cash is received.
I used the $10,000 to exaggerate the effect at year-end. Accrual accounting allows you to recognize the portion of income when it is earned and not all in December when the cash is received. In this case the IRS requires that the gift cards be tracked separately to accurately recognize the income when the actual sale of goods on services is done.
The IRS has successfully challenged gift card sales made by one business to another. The IRS believes that such structures do not qualify under the income deferral rules and therefore require the incomes to be recognized when the cash is received.
In some cases the sale of the gift card represents a material percentage of sales and in those cases the IRS has increased its scrutiny of those sales and classified them as a “Tier II” issue for examiners. Tier I and Tier II issues designated by the IRS for special audit consideration.
Finally to qualify for income deferral elections must be made with and approved by the IRS and without these the ability to defer the reporting will be disallowed.
New Mexico Department of Taxation and Revenue generally follows the IRS for the reporting of income.
In those cases where the sale of gift cards is de minimis compared with the total sales for the year, reporting of income on the cash basis or when the cash is received is far easier to deal with than tracking the individual cards and associated sales than could be justified by any tax savings.
Zlotnick, Laws and Sandoval, PC is NMRA’s endorsed provider of accounting services.
The New Mexico Restaurant Association’s mission is to empower the food and beverage industry by promoting and protecting common values and interests. It has more than 1,000 members in 111 cities all over New Mexico, who join together for meetings, seminars and the hospitality industry awards to honor the industry’s top achievers. It has actively represented and promoted the food service industry in New Mexico since 1946.