Monday, March 23, 2015

What are the tax implications of issuing reward points or coupons to your customers?

What are the tax implications of issuing reward points or coupons to your customers?

This issue was recently discussed at the 2015 Tax Law Conference held by the Federal Bar Association in Washington, DC.  According to treasury regulations, a business that issues rewards, coupons, and the like with the sales of merchandise may deduct the estimated cost of the customer redeeming those rewards, coupons, etc. from their income.  For instance, if your business provides customer rewards based otax magnifying glassn products the customer purchases.  When the customer redeems those rewards, assume the cost to your business is .50 cents on the dollar (for the sake of using round numbers) and assume the customer spent $100.00 when he/she redeemed those rewards or coupons.  The amount your business would be able to use as a deduction on your tax return is $50.  This situation is an exception from the “all-events test” and “economic performance requirement” in §461(h) of the Internal Revenue Code.  This exception does not apply to credit card companies that issue reward points because the reward points are not tied to the sale of merchandise.

A potential new approach that could be considered by the IRS for customer loyalty programs and the duty of financial reporting used by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) is to treat part of the money received during the original transaction as deferred revenue to be allocated to the award points based on their relative value.  This deferred revenue would be recognized when the rewards are redeemed by the customer or they go unused and expire.  It is questionable as to whether this approach is more favorable to a business as each business’ situation will be different and show different results.  Converting to this type of recognition by the IRS would streamline some accounting procedures, as only one method of allocation of the revenue would be used for both the financial statements and the tax returns, but for large businesses, this would not greatly impact their accounting procedures as this is only a small portion of an instance where different methods are used in tax accounting and financial accounting.

Tax accounting and financial accounting standards can be very different and complex, therefore, it is very important to always seek advice from a tax professional to assist with your tax needs.

Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.