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Purchased Business- Gift Certificates

Technical topics regarding tax preparation.
#1
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I have a client who purchased a business and of course didn't do his due diligence or consult me 1st.

Any way later he finds out the business has 150k of outstanding gift cards out. The prior owner will not compensate him for the gift cards. My client has decided to honor the gift cards. In addition he has decided not to sue the prior owner.

I was going to book the cards as a liability and increase the goodwill on the purchase and amortize over 15 years.

Any thoughts on this approach? Different ideas?
 

#2
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Sounds like an additional but contingent liability assumed. For GAAP purposes you might revalue the liability each year. For tax, liability is a contingent amount and amortization begins when gift cards are redeemed?

Also anybody have an idea on what class to assign a rent security deposit acquired in an asset acquisition?
 

#3
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For this client only worried about tax and not book. The problem is determining how much of the old gift certs have been redeemed at year end. He doesn't have the best records on this. he has a total of outstanding put not a breakdown of pre and post purchase.

Due to the lack of records on the outstanding amount I was going to amortize the pre purchase amount the same as goodwill over 15 years. I thought that was being conservative
 

#4
JR1  
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For tax....wondering if we're even required to recognize that? the option being to just record the free whatever when/if redeemed....

'cuz I'm also thinking you'll create an accounting nightmare trying to keep it up and adjusted constantly....
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#5
Nilodop  
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It might help to know

what kind of business

what exactly was purchased

what accounting method was being used

what accounting method is being used

whether Rev Proc 2013-29 "might" be relevant

maybe even more
 

#6
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He purchased a massage spa. He purchased the equipment and the clients. I was going to put him on the accrual basis. This is the initial return for him. I guess he didn't know he would be responsible for these gift certificates until later.

I wanted to book them as a payable. The more I think about the issue for tax maybe it doesn't matter. The old certificates will not be booked as income when they are used so I would not be entitled to an expense for the original cost the client paid.
 

#7
taxcpa  
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If he purchased the equipment and clients, but not the entity itself, how do you arrive at any form of liability? Was there an agreement to honor the certificates? You state pretty clearly that there was not.

Agreeing to provide services going forward based on monies paid to the previous entity is not a liability, but simply forgoing revenue in order to not upset the clientele. Can't get to a liability as there is no legal obligation.

Different story if he purchased the entity itself including all assets and liabilities. Then you are dealing with turning a fraudulent concelement into an accounting entry. Not sure how to do that.

Based on the facts as presented. FWIW.
 

#8
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taxcpa wrote:If he purchased the equipment and clients, but not the entity itself, how do you arrive at any form of liability? Was there an agreement to honor the certificates? You state pretty clearly that there was not.

Agreeing to provide services going forward based on monies paid to the previous entity is not a liability, but simply forgoing revenue in order to not upset the clientele. Can't get to a liability as there is no legal obligation.

Different story if he purchased the entity itself including all assets and liabilities. Then you are dealing with turning a fraudulent concelement into an accounting entry. Not sure how to do that.

Based on the facts as presented. FWIW.


Totally agree and it brings with it NO liability, no risk and in theiry, captures the loosses faster than amortization. Good Call!!!
 

#9
JR1  
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It becomes optional....tho' for holding onto his customers, I can see that he'll want to recognize those gift cards as presented. But legally....no liability. So don't recognize anything at this point is my call.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#10
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Thanks for the replies.

He is going to honor the cards so as not to upset the clients. I will not book the previous owners gift certs as a liability for tax purposes.

I will put him on the accrual basis. Do you see any problem with booking the gift certificates my client sold that were not redeemed at year end as a liability for tax?
 


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