Tax treatment of store coupons and customer incentives.

• Author: Guertin, Scott

Price rebates, store coupons and other promotional incentives continue to be a strong marketing tool for retailers. These types of incentives provide retailers with opportunities to build price flexibility into their current marketing strategies. The importance of these incentives will likely continue in the 1990s as retailers pursue new ways of stimulating consumer spending.

The IRS has recently been taking a closer look at the tax accounting methods used by retailers establishing accruals or reserves for these types of consumer incentives. Prior to 1987, Sec. 466 provided an election through which a taxpayer could deduct accruals or reserves that were established for "qualified discount coupons" (e.g., newspaper and other publicly offered coupons) redeemed within six months after year-end. This election was repealed for tax years after 1986, thus hindering taxpayers, ability to currently deduct reserves established for rebates and coupon redemptions.

Reserves established for coupons and other promotional incentives distributed to the public without any purchase by the consumer cannot be deducted until the coupons are redeemed. For example, mass distribution of advertlsmg coupons to promote a new product and advertising coupons inserted in newspapers would not create deductible reserves.

A deduction is available, however, for certain types of narrowly defined coupon programs, as explained in Regs. Sec. 1.451-4. If an accrual basis taxpayer issues a coupon with a sale and such coupons are redeemable by consumers in merchandise, cash or other property, the taxpayer will be allowed a deduction for estimated redemption reserves. Rev. Rul. 78212 further explained that a taxpayer may deduct reserves only if the coupons are redeemable without any additional consideration from the consumer. Coupons that merely provide discounts on subsequent purchases do not qualify.

Although many traditional coupon programs will not qualify, the deduction should be available for certain targeted incentives used as part of special...