Tax planning for gift certificates, layaways and store credits.During the holiday season many retailers saw an increase in sales of gift certificates and layaways. These "advance payments" are often received in one fiscal year, with final sales or redemptions not occurring until a subsequent year. In addition, some retailers will issue store "credits" (in lieu of cash refunds) for returned merchandise. Attention should be given to the tax opportunities that exist to defer income recognition and sales tax sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. on these transactions to a later year. For income tax purposes, these cash receipts generally must be reported no later than when they are reported as income in the company's financial statements. Reporting these receipts as sales in the financials prior to actual fulfillment produces the worst tax results from a cash flow standpoint. It causes the full amount of the cash payments, with no deduction or reserve for the cost of goods, to be taxable. This rule applies even though there may be certificates, deposits or store credits that go unredeemed or unapplied for many years. In addition, many states require that sales tax be reported and paid for the period in which the sale is reported on the books. Companies that treat receipts as deposits (i.e., as liabilities for financial statement purposes) can defer reporting taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. for up to two years. In addition, if advance payments remain unfulfilled after two years, the company may be allowed a deduction for estimated cost of goods sold Cost of goods sold The total cost of buying raw materials, and paying for all the factors that go into producing finished goods. cost of goods sold at that time. This income tax deferral tax deferral The delay of a tax liability until a future date. For example, an IRA may result in a tax deferral on the amount contributed to the IRA and on any income earned on funds in the IRA until withdrawals are made. is available both to companies whose financial accounting method is already in place as well as to those willing to change. Those companies wishing to change their financial statement reporting in order to obtain the tax benefits should apply for an appropriate letter ruling from the Service to ensure the result. An IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. ruling can generally be obtained within six months. For state income tax purposes, most states would follow the Service's position. The sales tax treatment of advance receipts varies from state to state. In some states, sales tax collection and reporting will be deferred based on the deferral of income in the financials. Others do not require sales tax until a final sale of goods actually occurs. From an administrative or systems viewpoint, a change conforming financial statement sales with those reported on sales tax returns would be the simplest approach. Gift certificates, layaway An agreement between a retail seller and a consumer that provides that the seller will retain designated consumer goods for sale to the consumer at a specified price on a future date, if the consumer deposits with the seller an agreed upon sum of money. deposits and store credits may also create significant liabilities if state escheat The power of a state to acquire title to property for which there is no owner. The most common reason that an escheat takes place is that an individual dies intestate, meaning without a valid will indicating who is to inherit his or her property, and without relatives who law requirements are not met. Many state laws provide that cash or property held for a customer will revert to the state if unclaimed for a certain period of time. These laws vary from state to state both as to when different types of property escheat and interim reporting responsibilities. For example, in New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , gift certificates escheat to the state after five years, whereas consumer credit balances escheat after only three. A report must be filed with New York State on February 15 for all consumer credit balances unclaimed as of December 31 of the prior year, and a report must be filed on March 10 for all other items unclaimed as of December 31 of the prior year. As a final point, for those companies that have recognized gift certificates and layaways as income, a tax deduction Tax deduction An expense that a taxpayer is allowed to deduct from taxable income. tax deduction See deduction. should be available when escheat payments are made to a particular state. |
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