By Jill Nyboer, Aprio LLC | Vendor Bylines —
Gift card sales are increasing with each year and with good reason. They are an excellent source of income for retailers and restaurateurs, since customers frequently spend more than the value of the gift card once they’re in the door. So what do you need to know if you’re planning to offer gift cards to customers?
You can defer revenue for two years for unredeemed gift cards
For tax purposes, you have the option to defer income from the sale of gift cards until the earlier of the year in which the customer redeems the card or the end of the second year following the year in which the card is sold. Although the unredeemed gift card will still be a deferred revenue on your books at the end of two years, you must pick it up in revenue by the end of the second year on your tax return.
Be clear about gift card expiration dates
Many gift cards expire within a given timeframe, but there are rules around expiration dates. Colorado does not have any expiration date provisions; however, federal law states that gift cards must remain active for at least five years.
You can treat gift cards issued for refunds as cash
Retailers and restaurants often issue gift cards in lieu of cash refunds to ensure that the customer still spends that money in their store or restaurant. A safe harbor rule allows retailers and restaurants to treat the issuance of the gift card as if a cash refund was given and a simultaneous sale of a gift card was made. This rule provides better matching of income and costs, and it simplifies your recordkeeping.
You can claim a deduction for unredeemed gift cards
Gift cards redeemable in cash that are outstanding longer than five years without being redeemed must be submitted to the state of Colorado as unclaimed property. These gift cards should be taken off your books with no revenue recorded. The gift card sale would have already been recorded as income for tax purposes. You can then claim a deduction on your taxes in the year the gift card was escheated to the state. The unclaimed property rule does not include gift certificates issued for food, products, goods or services but does apply to gift cards. See Colo. Rev. Stat. §38-13-108.4. It also does not apply to gift cards issued by a business with annual gross receipts from the sales or issuance of all gift cards totaling $200,000 or less. See Colo. Rev. Stat. §38-13-108.9 and H.B. 13-1102, §3. Colorado allows business to retain 2% of the value or $25 (whichever is greater) from the amount that is remitted to the state.
Gift cards are an excellent way to bring in new customers and ensure returning business. If you’re offering gift cards this year, make sure you’re taking advantage of available deductions to get the full benefit.
Questions about how to account for gift cards? Contact Jill Nyboer, Aprio LLCsenior tax manager, at firstname.lastname@example.org.