Question

Corporate Finance:

Article from IRS Website:

Advance Payment for Sales

Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods held primarily for sale to customers in the ordinary course of your trade or business. However, the rules do not apply to a payment (or part of a payment) for services that are not an integral part of the main activities covered under the agreement. An agreement includes a gift certificate that can be redeemed for goods. Amounts due and payable are considered received.

Special rules apply to the deferral of advance payments from the sale of certain gift cards. See Revenue Procedure 2011-18, 2011-5 I.R.B. 443, as modified and clarified by Revenue Procedure 2013-29, 2013-33 I.R.B. 141 (or any successor).

How to report payments.

Generally, include an advance payment in income in the year in which you receive it. However, you can use the alternative method, discussed next.

Alternative method of reporting.

Under the alternative method, generally include an advance payment in income in the earlier tax year in which you:

• Include advance payments in gross receipts under the method of accounting you use for tax purposes, or

• Include any part of advance payments in income for financial reports under the method of accounting used for those reports. Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements.

• Example.

You are a retailer. You use an accrual method of accounting and account for the sale of goods when you ship the goods. You use this method for both tax and financial reporting purposes. You can include advance payments in gross receipts for tax purposes in either: (a) the tax year in which you receive the payments; or (b) the tax year in which you ship the goods. However, see Exception for inventory goods, later.

Question: GameAll, a C-Corporation popular gaming retail store chain, sold $2.2 million in gift cards for Christmas (during November and December). They are on a calendar year. Based on what you read from IRS Publication 538 when should the GameAll store include the $2.2 million in gift card sales as income?

Answer 1