Restaurant gift certificate liability. When is a gift certificate or gift card income?

Are you correctly recording Gift Certificate/Card liability? IRS audits always audit Gift Certificate/Card Liability? By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-292-2009 Please consult with your professional tax CPA regarding your specific.

We are specialists in helping restaurateurs with restaurant industry taxation. Most restaurateurs never reconcile gift certificate or gift card liability. I will call certificates and cards “gift cards” for this example. The IRS requires that gift cards that are older than 2 tax years are treated as taxable income. Most restaurants have gift cards on their books that are older than two tax years.

Here is a good example. ABC Restaurant was audited by the IRS for the tax year of 2011.

During 2008 ABC issued $8K of restaurant gift card, $5K of cards have been redeemed during 2008-2011. Balance unredeemed at 12-31-11 is $3K
During 2009 ABC issued $10K, $6K of cards have been redeemed during 2009-2011. Balance unredeemed at 12-31-11 is $4K

During 2010 ABC issued $14K of restaurant cards, $7K of cards have been redeemed during 2010-2011. Balance unredeemed at 12-31-11 is $7K

During 2011 ABC issued $11K of restaurant cards, $5K of cards have been redeemed during 2011. Balance unredeemed at 12-31-11 is $6K

The general ledger and the financial statement books shows $20K as Gift card Liability.

The allowed amount for Gift card Liability is $13K which is the outstanding balance for the most recent two tax years or $7K + $6K

The IRS will assess tax on $7K of taxable income which is the difference between what the general ledger shows and what the correct amount should be. The $7K of income is arrived at by comparing what the general ledger/financial statements and the amount of the gift cards. for the past two tax years. 2008 and 2009 outstanding liabilities should have been reclassified from gift card liability to income in 2010 and 2011.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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