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Tax Consequences Of Gift Cards Provided To Employees

  Issue: Whether an employer’s provision of gift cards, say from a local department store, to employees can be excluded from income for income tax and FICA withholding purposes.

Previously, this could have been possible based on a Tax Court case involving gift certificates for Hallmark products Hallmark Cards gave its employees which were worded to insure that the certificates were redeemable for merchandise only. A recent Private Letter Ruling rejects the Hallmark case because of the statutory provisions that have since been adopted governing fringe benefits. Related to this, Treasury Regulations have been issued which specifically include in income gift certificates even if the certificate is redeemable for property that would otherwise be excludible under the statute and Regulations. Specifically, Treas. Regs. Section 1.132-6 provides:

(c) Administrability. Unless excluded by a provision of chapter 1 of the Internal Revenue Code of 1986 other than section 132(a)(4), the value of any fringe benefit that would not be unreasonable or administratively impracticable to account for is includible in the employee's gross income. Thus, except as provided in paragraph (d)(2) of this section, the provision of any cash fringe benefit is never excludable under section 132(a) as a de minimis fringe benefit. Similarly except as otherwise provided in paragraph (d) of this section, a cash equivalent fringe benefit (such as a fringe benefit provided to an employee through the use of a gift certificate or charge or credit card) is generally not excludable under section 132(a) even if the same property or service acquired (if provided in kind) would be excludable as a de minimis fringe benefit. For example, the provision of cash to an employee for a theatre ticket that would itself be excludable as a de minimis fringe (see paragraph (e)(1) of this section) is not excludable as a de minimis fringe.
Bottom line, gift cards are treated as cash payments and are taxable as such.
DISCLAIMER Documents provided under “Notes, Briefs, & Memoranda” at are intended solely to provide examples of engagements and analysis representative of the type and quality of services provided by Tax Counsel, Ltd. and may not be relied on as tax advice. This is because tax consequences are highly dependent on the facts and circumstances of a given situation and, in addition, even in identical situations, cases referenced can be reversed by subsequent statute or case law. Also tax statutes and related Treasury Regulations change often and are sometimes even given retroactive effect. Further, to ensure compliance with requirements imposed by the IRS under IRS Circular 230, please be advised that any tax commentary contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.