Gift Cards

The sale of gift cards and gift certificates is a widespread business practice in many industries. In the past, sales of gift cards were recognized as income in the year of sale if the gift cards were redeemable by an unrelated entity. This practice was problematic because if the gift card was never redeemed, or was used in a later year, the income was not earned in the year of sale. Instead, the sale was actually an advanced payment for goods or services.

Under the deferral method of accounting, an accrual-basis taxpayer that receives an advance payment for goods or services must include the payment in gross income in the year of receipt to the extent recognized in revenue on an applicable financial statement (AFS). If an AFS isn’t filed, the advance payment is included in income to the extent earned in that year. This income deferral was available only for gift card transactions between related entities.