Discussion:Gift Cards taxed when sold or redeemed??
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| Revision as of 23:01, 12 December 2007 Jim CPA (Talk | contribs) (In regard to Tax) ← Previous diff |
Revision as of 02:01, 13 December 2007 Mtmckeecpa (Talk | contribs) (My franchise cli) Next diff → |
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| {{ForumReplyPost|UserID=Jim CPA|Date=12 December 2007|Text=In regard to Taxalmancer's comments, I recently heard of a case in the Seattle area where a salon had to write a check to the state of Washington for several hundred of thousands of dollars for unredeemed gift cards. Ouch.}} | {{ForumReplyPost|UserID=Jim CPA|Date=12 December 2007|Text=In regard to Taxalmancer's comments, I recently heard of a case in the Seattle area where a salon had to write a check to the state of Washington for several hundred of thousands of dollars for unredeemed gift cards. Ouch.}} | ||
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| + | {{ForumReplyPost|UserID=Mtmckeecpa|Date=13 December 2007|Text=My franchise clients use [http://valutec.net/ Valutec] for their gift card program. X walks in to ABC franchise and buys $100 gift card, Valutec swipes the franchise bank account for $100, even at this point. | ||
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| + | If X redeems the gift card then Valutec remits payment back to the franchise. Valutec tracks the balance of the gift cards. | ||
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| + | The unclaimed property is an interesting point...Thanks. | ||
| + | }} | ||
Revision as of 02:01, 13 December 2007
Discussion Forum Index --> Basic Tax Questions --> Gift Cards taxed when sold or redeemed??
Discussion Forum Index --> Tax Questions --> Gift Cards taxed when sold or redeemed??
| 7 October 2007 | |
| Is anyone familiar with the current rules on accounting for gift cards? Specifically, if a hair salon sells gift cards (no expiration date), are they considered taxable income when sold or when redeemed? | |
| 7 October 2007 | |
| When sold....they are sales whether they be current or future use. The sales are cash/check/credit card....if used they could be 2 years from the time. Constructively earned.... | |
| 7 October 2007 | |
| It's not clear what your question is -
Is it when do you record income for income tax purposes? Or is is when do you record it as income for financial statement accounting purposes? | |
Donniecastleman (talk|edits) said: | 7 October 2007 |
| I personally think that since you lose control of how the funds are spent once the gift cards hit the door that they are taxable as income when you sell them. Let's inflate the situation. Say you sold 1,000 gift cards and that 250 of them were lost and never redeemed, 250 of the gift card recipients moved out of state, and well, 250 of the recipients died, leaving only 250 people to come in and redeem the gift cards. Using this inflated larger than reality scenario, it's easy to see that the cards are income when you sell them. Hope that helps, I'm sure the big honchos will be along shortly to concur or dispute what I've said here, but that makes sense to me. Hey if you're in Vegas, I'll buy a gift card and give it to myself, I really need a haircut! :) | |
TheTinCook (talk|edits) said: | 7 October 2007 |
| The easiest way is to include it in income when sold. Advance payments can be a little complex, so check out Reg. 1.451-5. | |
| 7 October 2007 | |
| Let me clarify, I was referring to when should the income from gift cards be recorded for tax purposes. | |
| 7 October 2007 | |
| I would ordinarily pick the income up when the coupons are redeemed (and keep those funds showing as a liability until then).
However, without an expiration date - there's no telling when they'll be redeemed, so you might as well record them as income when sold. | |
| 7 October 2007 | |
| I received 2 gift cards from the hair salon that I use as birthday gifts from 2 different people. To the salon they are a liability until I use them. As I've been using them, the salon records a sale and reduces the liab. | |
| 7 October 2007 | |
| sure they do, Barbara. Especially if the purchaser paid cash for them and the redemption is a no-cost service. | |
| 7 October 2007 | |
| What do you mean by taxed? Sales tax? Hair salons do not pay or collect in NYS unless they sell something ie a comb or brush. | |
| 8 October 2007 | |
| You should read Rev proc 2004-34. It addresses this issue of "advance payments" and how they should be recognized for tax purposes. You need to read the FULL document but I'll post one example which is on point.
Example 7. F, a hair styling salon, receives advance payments for gift cards that may later be redeemed at the salon for hair styling services or hair care products at the face value of the gift card. The gift cards look like standard credit cards, and each gift card has a magnetic strip that, in connection with Fs computer system, identifies the available balance. The gift cards may not be redeemed for cash, and have no expiration date. In its applicable financial statement, F recognizes advance payments for gift cards in revenues when redeemed. F is not able to determine the extent to which advance payments are recognized in revenues in its applicable financial statement for the taxable year of receipt and therefore does not meet the requirement of section 5.02(1)(b)(i) of this revenue procedure. Further, F does not determine under a basis described in section 5.02(3)(b) of this revenue procedure the extent to which payments are earned for the taxable year of receipt . Therefore, F may not use the Deferral Method for these advance payments. | |
| 11 October 2007 | |
| Recognize when sold for tax purposes at least. Think of a senario where 50% of cards do never get redeemed. Client recieved cash and spent it with a large amount of Unearned Revenue for the rest of his life? I don't think so. Not for tax purposes. IMHO. | |
| 9 December 2007 | |
| The Sale of Gift Cards is reported as income for tax purposes, however, with the proper election, you may be able to defer the income for an additional year. A new audit directive was issued by the IRS in May 07 at this link http://www.irs.gov/businesses/article/0,,id=170842,00.html which outlines the procedure for reporting and the election. | |
Taxalmancer (talk|edits) said: | 11 December 2007 |
| Here's a bigger issue for you than the timing of the taxation. Almost every state considers unredeemed gift cards to become the property of the state, i.e. Unclaimed Property, which must be submitted to the state (usually part of the state AG's office) at the end of the unclaimed period as the state defines it.
Check your state to see when you must turn over the unredeemed gift cards/certificates. Some have a 5-year statute. Also be mindful that even if you have no expiration date you will still have to turn over the money to the state after their specific statutory period. This is an issue that most small businesses never think about and it is a time bomb waiting. If you never filed the annual report to the state and submitted the unredeemed certificates/cards then the statute never began so there is no limit to the time period they can audit and demand payment. Moreover, if you never kept records (or accurate records) about unredeemed certificates you're leaving yourself open to the state applying an industry standard. This is a killer issue. | |
| 12 December 2007 | |
| In regard to Taxalmancer's comments, I recently heard of a case in the Seattle area where a salon had to write a check to the state of Washington for several hundred of thousands of dollars for unredeemed gift cards. Ouch. | |
Mtmckeecpa (talk|edits) said: | 13 December 2007 |
| My franchise clients use Valutec for their gift card program. X walks in to ABC franchise and buys $100 gift card, Valutec swipes the franchise bank account for $100, even at this point.
If X redeems the gift card then Valutec remits payment back to the franchise. Valutec tracks the balance of the gift cards. The unclaimed property is an interesting point...Thanks. | |
