United States

Deductibility of accrued customer rewards

TAX BLOG  | 

A U.S. Court of Appeals decision recently overturned the Tax Court’s determination regarding the deductibility of the estimated future cost of fuel discounts earned by its customers as part of a customer reward program. Although the case focused only on a specific program, the conclusion and its underlying principles could potentially apply to a wide variety of customer reward programs.

The original Tax Court ruling denied a taxpayer’s ability to deduct accrued customer rewards until the customer redeemed the rewards. The Court of Appeals reversed this decision, and this reversal could be very beneficial for taxpayers.

The crux of the determination was whether the taxpayer’s liability for the customer reward program was fixed. The Court of Appeals concluded that the taxpayer formed a unilateral contract with its customers during the purchase of groceries. This contract provided customers future discounts on fuel if they purchased groceries.

As unilateral contracts only require one party to make a promise in exchange for performance, the purchase of groceries fixed the reward liability for the taxpayer. Based on this appeals court decision, taxpayers should now be able to match the costs of providing future fuel discounts in the same tax year the associated grocery revenues are recognized.

It may be prudent to revisit the tax treatment of your reward programs in light of this decision.


Christian Wood

Principal

Christian leads the technical research and analysis for RSM’s accounting methods and periods team nationally. Contact him at christian.wood@rsmus.com.

Areas of focus: Accounting Methods and PeriodsTangible Property Tax Consulting Washington National Tax