Discussion:Accounting for Gift Certificates

I have a salon client who sells gift certificates throughout the year. My understanding is the amount received from the certs should not be included in sales but instead reflected as a liability (i.e., deferred revenue). Any agreements?

Also, the same client donates gift certificates to charities each year. Proper accounting? Thanks.

How am I to show the cash as income when the liability balance represents that which is not redeemed? The original JE is:

Cash

 Deferred Rev - Gift Certs

Besides this client is on the accrual basis. So therefore, I think your comment would not apply.

Bottom Line:

To what source can you reference re: contributions not deducted unless cashed.

Thanks to you both.

Understood but refer to Tres Reg 1.451-5:

Gift Certificate - Deferred Income - Balance Sheet Liabilities Because the income from certificates must be reported no later than it is for book purposes; it is not likely that the examiner will see this on the Schedule M. The examiner is more likely to find this issue on the balance sheet as a liability identified as certificates, customer credits or customer deposits. In addition to requesting an explanation or written documentation of their certificate issuance and record keeping procedures, the examiner should request samples of the certificates. Most will bear a serial number that will aid in determining how long the certificates have been outstanding. The taxpayer should also have some internal controls to prevent employees from abusing the certificates and to prevent counterfeiting. The examiner should get descriptions of these procedures and/or manuals as well as any internal audit or security reports dealing with certificates.

Deferral for Up to Two Years- Although Treas. Reg. section 1.451-5 allows for the deferral of recognition for up to two years, the examiner must keep in mind that the all events test under Treas. Reg. section 1.451-1 needs to be applied first. Certificate income is recognized "when all events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy." The regulations do not permit deferral if the income has already been earned. The examiner should therefore examine the retailer's redemption policy. If no cash refunds are permitted or if the certificates expire before the end of the second year, the income may have to be recognized sooner.

Deferred Income - Treas. Reg. section 1.451-5(c) (1) (iii)- Because the merchandise for which certificates can be redeemed generally is not identifiable until the gift certificate has actually been redeemed, no deduction is allowed for the cost of the merchandise at the point the income is recognized under Treas. Reg. section 1.451-5(c)(1)(iii). A deduction is allowed only when the merchandise to be redeemed becomes identifiable, that is, when the certificate is actually redeemed. If the certificates are redeemable for either goods or services (for example, at a department store with a Retailer) the regulations should still be applicable. Gift certificates strictly redeemable for services are governed by Rev. Proc. 2004-34, 2004-22 I.R.B. 991, which has rules that are very similar

If the taxpayer changed accounting method to accrual in order to defer income from certificates, would this qualify as an automatic change in accounting method?

Thanks much,

Katherine

Thank you.

For GAAP purposes, the value of the unredeemed gift certificates is tracked as deferred revenue until redeemed or expired. For states in which gift certificates have no legal expiration date (i.e. California) the value of outstanding gift certs. should be booked as a liability and will remain so until they are redeemed. This will be a problem for your clients if they have no way of tracking redemption as the liability will grow larger and larger.

For tax purposes, the gift certificates should be reflected as income in the year received regardless of the basis of accounting for tax. Accrual taxpayers will have to reflect the outstanding gift cert. value as a book and tax diff.

Thanks a bunch for the info. It appears, like most people, do not realize that there is a responsbility to turn that money over the to the state. Since only 10% of businessess know or comply, it looks like some of my clients are not alone. How would you handle the transaction on the books.

Thanks a bunch for the info. It appears, like most people, do not realize that there is a responsbility to turn that money over the to the state. Since only 10% of businessess know or comply, it looks like some of my clients are not alone. How would you handle the transaction on the books.

Who is the "owner" of the unclaimed property with respect to an expired gift certificate?

Who is the "owner" of the unclaimed property with respect to an expired gift certificate?

Gift certificates are a pain in the butt. I have a small salon that has this issue. They sell some certificates and give out many more. As an expedient method of dealing with this at the end of each year I adjust the liability account for gift certificates to the amount sold during December. History has shown that anything older will never be redeemed. And the charitable portion is not deductible until redeemed.

Is he reporting his income gross? He should only be reporting as income what he collects, which means he gets the "deduction" by not reporting the gross amount billed but only the amount received.