COVID-19: Tax Implications of Gift Cards Sales + GoFundMe Campaigns
In this time of unprecedented crisis for the restaurant industry, many operators are turning to alternative revenue sources, like gift card sales and GoFundMe campaigns, to create relief funds for their employees, the majority of whom they have been forced to lay off of furlough in the past few weeks. While these are immediate solutions to immediate needs, restaurants should be aware of the tax implications on their business in order to help guide their decision making.
Below you will find resources we’ve compiled to help restaurants navigate these alternative revenue sources and their tax implications.
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Gift Cards
Taxability of Gift Card Sales
Restaurants selling gift cards should review state laws [here] and the regulation of redemption (i.e. gift cards cannot expire within five years from the date they were activated). It is also critical for restaurants to ensure that they are appropriately recording income from gift card sales, and below are three options for doing so [source 1]:
Cash basis method – Income is recorded on the tax return in the year in which it was sold.
One-year deferral method – Income is recorded at the earlier of either the redemption of the gift card or one taxable year following the sale of the gift card.
Two-year deferral method – Income is recorded at the earlier of either the redemption of the gift card or two taxable years following the sale of the gift card.
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Taxability of Giving Gift Cards to Employees as a Form of Payment
If a restaurant gives a gift card to an employee as a form of payment, that is considered taxable under IRS code section 102 [source 2].
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Redemption Terms
Restaurants should strongly consider creating redemption terms for gift cards, particularly as they start to think about reopening their doors because this will directly affect their cash flow. It may be wise to think about terms that explicitly state guests can redeem gift cards a certain amount of time after the purchase date (i.e. six months after).
GoFundMe Campaigns
Small Business Relief Initiative
GoFundMe.org recently created the Small Business Relief Initiative to help small businesses that have been affected by the COVID-19 pandemic, and will issue matching $500 grants to qualifying businesses that raise at least $500 on GoFundMe. There should be no tax implications for the GoFundMe Small Business Relief Initiative per the following statement on its website:
“There should be no tax implications because you have established that you are a small business negatively impacted by the COVID-19 pandemic. GoFundMe.org will not require any goods or services to result from the grant; instead it is provided to you as a gift. That said, we cannot provide you any tax advice as everyone’s situation is different and tax rules change from time to time. We recommend you speak to a financial advisor.” [source 9]
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Beyond the Small Business Relief Initiative
Generally speaking, GoFundMe is required to file a Form 1099 for campaigns that receive over $20,000 in donations or more than 200 total donations.
There is conflicting advice from those who have received large donations via GoFundMe about how the IRS processes the amount, but to be safe it is always best to report amounts over $20,000 as a 1099 since GoFundMe will be reporting it as well. Restaurants should record the 1099 income as income, and then on another income line, report an offsetting reduction and add a short explanation, such as:
“All amounts reflected in the 1099-K are excludable from income under IRC Section 102. These amounts reflect the money the taxpayer received as the result of gifts from donors. Those gifts were used to pay [XX] of the taxpayer and are excludable from gross income.” [source 10]
The taxable amount is completely dependent on the donated amount.
501(c)(3) Organizations
A large number of restaurants are deciding to create or partner with 501(c)(3) organizations in order to accept tax-exempt donations that they can give directly to their employees. A 501(c)(3) organization is a corporation, trust, unincorporated association, or other type of organization exempt from federal income tax under section 501(c)(3) of Title 26 of the United States Code.
One of the primary benefits of being tax-exempt under IRC Section 501(c)(3) is the ability to accept contributions and donations that are tax-deductible to the donor. Additional benefits include, but are not limited to [source 11]:
Exemption from federal and/or state corporate income taxes
Possible exemption from state sales and property taxes (varies by state)
Ability to apply for grants and other public or private allocations available only to IRS-recognized,
501(c)(3) organizations
Potentially higher thresholds before incurring federal and/or state unemployment tax liabilities
More information about exemption requirements for 501(c)(3) organizations is available on the IRS’s website, as well as a step-by-step application which includes questions and answers that will help an organization determine if it is eligible to apply for recognition of exemption from federal income taxation under IRC section 501(a) and, if so, how to proceed. Please consult your CPA for additional information.
Allocation of Funds
What are the implications of distributing gifts to employees / individuals (both those who were laid off or furloughed) with the money donated by gift cards or GoFundMe campaigns?
If restaurants distribute gifts to employees and the money is in exchange for services, such as using these funds to pay employees who are helping with delivery or cooking, this money is counted as wages and needs to be documented and paid as such.
If the money is gifted to individuals with no return of services (i.e. those who were laid off or furloughed), this is seen as a true gift and is excluded from the regular rate of pay.
The annual gift tax exclusion is $15,000 for both the 2019 and 2020 tax year, which is the amount of money that an individual or company can give as a gift to one person, in any given year, without having to pay a gift tax.
Are income replacement payments excluded from qualified disaster relief payments, and if so, does this require a portion of funds to be withheld to pay as income tax?
President Trump determined that the COVID-19 pandemic warranted a nationwide emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, thereby giving employers the opportunity to provide tax-free assistance to their employees under Section 139 of the IRS Code.
However, this does not apply to income replacement payments, which is outlined in the below paragraph from an article entitled “COVID-19: Section 139 Employer-Provided Tax-Free Disaster Relief Benefits” from national law firm Buchanan Ingersoll & Rooney: “Section 139 provides that qualified disaster relief payments from any source reimbursing or paying an individual for certain expenses in connection with a qualified disaster are not subject to income or employment taxes (Social Security, Medicare, and federal unemployment taxes). For this purpose, a qualified disaster relief payment includes any amount paid by an employer to or for the benefit of an employee to reimburse or pay “reasonable and necessary” personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Qualified disaster relief payments, however, do not include: (i) payments for expenses that are otherwise paid for by insurance or other reimbursements; or (ii) income replacement payments, such as the payment of lost wages, lost business income, or unemployment compensation [source 12].”
We recommend talking to your CPA to understand how to best track and categorize any such payments to employees so you can understand how to most effectively allocate relief funds to your team.
Disclaimer: The consolidated resources are here for your consideration. The information provide above is not legal advice. We recommend talking to your lawyer to ensure all state + federal compliance is maintained. If you do not have legal representation, we would be happy to connect you with legal counsel. We understand that circumstances are changing quickly and we are updating content as it is available.
