NEW IRS ADVICE ON TAXABILITY OF GIFT CARDS

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NEW IRS ADVICE ON TAXABILITY OF GIFT CARDS

BY MARILEE BASARABA, FSLG SPECIALIST (PACIFIC)

Many employers give employees birthday or holiday gifts. These gifts take a variety of forms

including a turkey, a ham, a gift basket, or a coupon to purchase a turkey or a ham at a local

grocery store. In recent years, the gift card has been a popular alternative because it provides

employees with more choices and greater convenience. Some employers believe that gift cards

are not taxable and qualify as excludable from income as a de minimis fringe benefit because

they meet the example of “traditional birthday or holidays gifts of low fair market value”, or

because they are non-negotiable (restricted to only certain items; the redemption time is limited;

and any unused portion is forfeited). However, Federal tax law does not view giving an employee

a turkey or a ham as the equivalent of giving an employee a gift card to purchase a turkey or a

ham. A recently issued Tax Advice Memorandum (TAM) in 2004 clarifies the tax law and

discusses this issue.

In order for a fringe benefit to be excludable as a de minimis fringe benefit, it must be a property

or service that is small in value, infrequent, and administratively impracticable. The TAM

determined that an employer-provided thirty-five dollar holiday gift coupon that is redeemable at

several local grocery stores is not excludable from income as a de minimis fringe benefit. The

IRS findings states that the gift coupon operates in the same way as a gift certificate which is

considered a cash equivalent. Cash equivalents are never excludable as a de minimis fringe

benefit.

The example in Reg.§1.132-6(a) of holiday gifts is limited to property; it does not include cash

(except for special rules that apply to transit passes and/or occasional meal money). The same

regulation states that cash is not excludable even when it is provided to purchase a property or

service that, if provided in kind, would be excludable as de minimis. The example given in the

regulation refers to an employer providing cash to purchase a theater ticket to the employee;

whereas, if the employer gave the employee the theater ticket it would be excludable as a de

minimis fringe benefit.

The Service holds that the “statute provides the basis for the exclusion”, wherein the regulations

describe examples of fringe benefits that are potentially excludable assuming all of the other

requirements of the statute are met. Because gift cards, certificates, and/or coupons are

considered cash equivalents, they do not meet the statute requirements to be excludable.

Furthermore, the value of the coupons was determinable and the frequency to individual

employees was ascertainable - all requirements that must be met in order for the coupons to be

excluded from income.

The TAM does not address a dollar threshold to establish a standard for the meaning of “small in

value.” However, we can look at other tax law for guidance. A 1959 revenue ruling states that the

value of a turkey or a ham is considered nominal or small in value. A 2000 legal memorandum

states that non-monetary recognition awards having a fair market value of $100 did not qualify as

de minimis fringes and are considered wages.

So, if an employer provides a turkey, a ham, or other property of nominal value to employees, the

value of these items is not considered wages or salary and is excludable from income. But if an

employer provides gift cards, certificates, or coupons to purchase a turkey, ham, or other nominal

value property, these are considered wages and are subject to income and employment taxes

(even when the card restricts the items purchased, the time to use the coupon, and any unused

portion is forfeited) because cash equivalents do not meet the de minimis fringe benefit

requirements.