United States

A reminder on the tax treatment of advance payments


In a recently released memorandum, the IRS concluded that a taxpayer could defer for up to two years the recognition of certain advance payment income received from the sale of unredeemed gift cards for goods or services. While this conclusion hinged on the facts and circumstances related to the specific taxpayer, it serves as a timely reminder of the tax treatment of advance payments received by companies.

Advance payments are amounts received in advance of the provision of goods, services or several other items. Generally, a taxpayer that receives an advance payment must include the advance payment in taxable income when received.

Though the tax rules in some instances allow a taxpayer to defer the recognition of income to a different period, the taxpayer must meet certain criteria and have adopted this deferral method for tax purposes.

The proper tax treatment of advance payments can be overlooked during the preparation of book income to taxable income reconciliation schedules, as taxpayers may have differing balance sheet terminology or be unaware of the tax consequences of these payments.

A company receiving payment in advance of the provision of goods or services should consult with its tax advisors to determine the proper tax treatment and assess whether a more optimal method of accounting would allow the company to defer the recognition of this income.

See our tax alert for more on this topic. 

Christian Wood


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

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