Accrual-basis taxpayers can defer revenue for up to two years following the end of the year in which gift cards are sold if the gift cards can be used to purchase merchandise. Similarly, taxpayers can defer revenue for up to one year following the end of the year in which gift cards are sold if the gift cards can be used to purchase services. A new IRS technical advice memorandum, TAM 201610017, addresses calculating the deferral of income when gift cards fall under either category.
To defer revenue from the sale of gift cards used to purchase merchandise, taxpayers must adopt a method of accounting that results in revenue from the gift card being recognized at the earlier of redemption of the gift card, recognition of the revenue for financial statement purposes, or two years after the year in which the gift card is sold. Revenue from gift cards that can be used solely for the purchase of services can be deferred following similar rules, except revenue from services can be deferred only for one year after the gift card is sold.
The new IRS technical advice clarifies that taxpayers who sell gift cards that can be redeemed for either merchandise or services can use a reasonable method to estimate the amount of gift card revenue attributed to the sale of merchandise or services. Though not explicit in the technical advice, objective criteria such as sales data related to goods or services could be used in estimating the revenue received from gift cards sold.
A TAM is nonbinding advice provided relevant to a specific taxpayer’s situation and may be relied on by only the taxpayer for which it is requested. However, a TAM is useful in determining the position of the IRS and can be relied on for purposes of penalty relief. Any taxpayer following the guidance in TAM 201610017 also should review carefully its fact pattern in light of the IRS guidance.
Taxpayers wishing to take advantage of this opportunity likely would need to file a Form 3115, “Application for Change in Accounting Method.” Generally, a change to allocate revenue between goods and services in combination with using a two-year deferral must be filed under the advance consent method change rules. Advance consent requests for a change in method of accounting must be filed during the tax year in which the requested method first will be used.