How to Legally Write Off Gift Card Liability
While gift cards might be a good way to increase customer loyalty and boost sales, they can create long-term financial responsibility for your business. Winery and CPG brands are required to account for unredeemed gift card liability according to their states' escheatment laws.
In this guide, I'll walk you through the legal and financial steps to write off gift card balances and improve reporting accuracy to stay compliant.
What Is Gift Card Liability and Why Does It Matter?
When a person buys a gift card, you don't get to count it as revenue right away. It actually becomes a liability on your balance sheet because the gift card is like a promissory note stating you owe a customer a certain amount in goods or services.
On your balance sheet, gift card liability is recorded as a current liability, meaning it's something you expect to settle in the near future. The balance remains a liability until it is resolved in one of three ways:
Redemption. The customer uses the card to make a purchase, allowing the amount to be recognized as revenue.
Write off. The card expires or becomes inactive for other reasons, so you can remove it from your liabilities because there is no longer an expectation that you owe the customer goods or services.
Transfer. Some states require you to transfer the value of a card to the state as unclaimed property upon expiration or when other conditions are met.
Accurately tracking gift card liability matters for compliance, but it also impacts your bottom line. Mismanagement of gift card liability can lead to overstated (or understated) liabilities, incorrect revenue projections, and exposure to penalties if you fall on the wrong side of state escheatment laws.
How Escheatment Laws Affect Gift Card Liability
Escheatment laws for gift cards require businesses to turn over unredeemed balances to the state after a period of inactivity. These laws treat unclaimed gift card funds like abandoned property, and each state has its own rules around timing, exemptions, and reporting.
States that might collect abandoned gift card balances include:
Alaska, after 3 years if the card has an expiration date
Colorado, after 5 years
Delaware, after 5 years
Hawaii, after 5 years
Idaho, after 5 years if there's no expiration date and the balance is more than $50
Illinois, after 5 years if there's an expiration date
Iowa, after 3 years
Louisiana, after 3 years
Maine, after 5 years
Mississippi, after 5 years
Montana, after 5 years
Nebraska, after 3 years if there's an expiration date
Nevada, after expiration (and only 60% of remaining value)
New Hampshire, after 5 years for balances more than $100
New Jersey, after 5 years
New Mexico, after 5 years
New York, after 5 years
North Carolina, after 3 years if there's an expiration date
North Dakota, after 3 years
Oklahoma, after 5 years
Pennsylvania, after 2 years if there's an expiration date
South Dakota, after 5 years
Tennessee, after 2 years if there's an expiration date
Texas, after 2 years if there's an expiration date
Virginia, after 5 years if there's an expiration date
Washington, after 3 years if there's an expiration date
West Virginia, after 3 years
Wyoming, after 3 years for balances more than $100
While you can leverage escheatment to reduce your liabilities and get old gift card balances off your books, there is a risk here. Moving the liability off your balance sheet in this way doesn't remove it completely. If a customer shows up with that gift card later, you may need to honor it — and even want to do so, as that might re-activate a previously lost customer.
When and How to Write Off Gift Card Liability
You can legally write off gift card liability when a card expires, it becomes inactive for a certain period, you transfer the balance to the state, or your state allows you to recognize unredeemed balances as breakage. Breakage is the process of recognizing the gift card balance as revenue after a period of time.
A process that follows legal and financial reporting standards helps you write off gift cards the right way. Steps you should take include:
Tracking gift card issues and expiration dates. Maintain records for each card, including the last activity, so you know when balances are eligible for write offs.
Reviewing applicable escheatment rules. Determine which state rules apply and how they impact managing gift card liabilities.
Applying breakage rules. Using behavioral trends regarding gift card use and accounting rules, determine if you can recognize the revenue or need to write off the liability without doing so.
Making journal entries. Write off the liability and move appropriate amounts to revenue or escheatment accounts.
As with any accounting practices, keep good records for audit and compliance purposes.
Best Practices for Managing Gift Card Liability
Proactive policies and reliable tracking systems help you best manage gift card liability. Here are some best practices I recommend for CPG brands:
Establish clear expiration and inactivity policies. Determine what is allowed by your state and create policies that define when gift cards expire or become inactive and what happens with them. Ensure you communicate this clearly to customers via written policies.
Track gift card redemption data. Monitor redemption patterns so you can recognize breakage and create strategies to reduce liabilities in the future.
Automate reporting and tracking. Use tools like QuickBooks to generate liability reports, and build systems that handle balance tracking for you.
Review liability balances regularly. Set up a time every quarter to review balances, address discrepancies, and handle escheatment tasks.
Common Mistakes to Avoid With Gift Card Liabilities
Even CPG brands that intend to keep up with this accounting task can run into issues if gift card liabilities aren't properly managed. Here are some of the most common mistakes I've seen with regard to this requirement and how you might avoid them:
Failing to track. If you don't have clear records of expiration or activity, you can't know when balances become eligible for breakage or escheatment. This can lead to liabilities adding up unnecessarily on your books. Automate tracking when possible and schedule regular reviews of gift card liability throughout the year.
Recognizing gift card sales as revenue too early. Reporting early revenue can inflate your income and create audit risks. Make sure you aren't recognizing gift card revenue until the balance is redeemed or breakage occurs.
Not following escheatment laws. Keep up with relevant state laws about gift card balances, and never simply assume that your gift cards are exempt.
Not documenting write-offs or breakage. Keep documents related to your gift card activity in case you need to prove your liabilities or revenues in an audit.
Neglecting gift card balance reviews. If you ignore gift card liability management, you leave room for small errors to add up to a large accounting mess. Engage in regular finance analysis and reconciliation to keep things accurate.
Improve Financial Clarity With Better Gift Card Liability Management
Managing gift card liability via legal, accurate write offs, and other processes reduces your tax exposure and ensures you have a good handle on your revenues. Working with experienced CPG accounting experts can help you remain in compliance with state laws and IRS regulations when dealing with gift card liability.
For personalized support, contact us today.
Author: Eileen Vasko
Eileen Vasko is an accomplished Accounting professional with over 10 years of experience in financial management, cost accounting, and compliance. As a former Controller at Iron Horse Vineyards, she excelled at managing complex financial operations, including inventory cost accounting. As the Accountant Manager Team Lead at BBG, Eileen specializes in building highly efficient accounting processes including accounts payable/receivable, payroll, and tax reporting. Eileen is highly skilled in using advanced accounting platforms and tools to drive efficient processes.
