Gift Cards for Small Businesses: How They Work, Rules and Accounting
Gift cards are one of the easiest holiday products a small business can sell. They need no stock, solve the "what do I buy?" problem and bring new customers through the door. They also come with legal rules on expiry and fees, and accounting that trips up many owners. Here is how they work and how to get them right.
Key takeaways
- Money from a gift card sale is not revenue yet. It is a liability until the card is redeemed.
- In the US, the federal CARD Act generally requires gift cards to last at least five years, and some states go further.
- Rules differ widely around the world, from no-expiry rules in some Canadian provinces to a three-year minimum in Australia.
- Unredeemed balances may count as unclaimed property in some US states, so track them carefully.
Gift cards are a staple of the holiday season. The National Retail Federation's annual holiday surveys have consistently found gift cards among the most requested gifts in the US. For a small business, that demand is an opportunity: a gift card sold in December brings cash in immediately and a customer in later, often in January when sales are slow.
But a gift card is not a normal sale. You have taken money for something you have not yet delivered. That simple fact drives the legal rules and the accounting. This explainer covers both, along with practical setup tips. It is general information, not legal or tax advice, so confirm the details for your location with a professional.
How gift cards work
When a customer buys a gift card, they pay you now. The recipient later uses the card to buy goods or services, and the balance on the card goes down. Some cards are never fully used, leaving a remaining balance that may never be redeemed. In accounting, that unused value is called breakage.
Small businesses usually offer one or more of these formats:
- Physical cards issued through your point of sale system, with a unique number or barcode.
- Digital gift cards sold on your website and delivered by email or text, ideal for last-minute buyers.
- Paper gift certificates, still common in salons, restaurants and service businesses, but harder to track and easier to forge.
- Promotional cards, such as "spend 100, get a 20 bonus card," which are given away rather than sold and are often treated differently under the rules.
Common mistake
Selling handwritten gift certificates with no central record. If you cannot see who bought what, how much is left and when each certificate was issued, you cannot account for them properly, spot forgeries or meet unclaimed property rules. Use your point of sale or a gift card platform to track every card.
The legal rules: expiry dates and fees
United States: the federal CARD Act
The Credit Card Accountability Responsibility and Disclosure Act of 2009, usually called the CARD Act, set federal rules for store gift cards that took effect in 2010. In general:
- Funds on a gift card cannot expire within five years of the date the card was issued or money was last loaded onto it.
- Inactivity or dormancy fees are allowed only after at least 12 months without use, no more than one fee per month, and only if they are clearly disclosed.
- Expiry dates and fees must be clearly disclosed on the card or its packaging.
Promotional cards that are given away, for example as part of a loyalty or marketing offer, are generally exempt from some of these rules if they are clearly labeled as promotional.
US state rules
States can give consumers more protection than federal law, and many do. California, for example, generally prohibits expiry dates and service fees on most gift cards and requires businesses to give cash back for small remaining balances, currently under 10 dollars. Several other states also ban expiry dates or require cash redemption of small balances. If you sell in several states, especially online, check the rules for each.
Other countries
| Country or region | General position on expiry | Notes |
|---|---|---|
| United States (federal) | At least five years from issue or last load | States may add stronger protections |
| Canada | Several provinces, including Ontario, generally ban expiry dates on gift cards | Rules are set by each province |
| Australia | Minimum three-year expiry for most gift cards sold since November 2019 | Most post-purchase fees are also banned |
| United Kingdom | No specific statutory minimum expiry period | Terms must be fair and transparent under the Consumer Rights Act 2015 |
| European Union | Varies by member state | Some countries set minimum validity periods |
Even where the law allows short expiry dates, generous terms are good business. An expired card with money on it creates an unhappy customer and often a public complaint.
Unclaimed property and escheat
In the US, every state has unclaimed property laws, sometimes called escheat laws. They require businesses to hand over certain unclaimed funds, such as uncashed checks, to the state after a set period. How these laws apply to gift cards varies a lot. Some states fully or partly exempt gift cards, while others may require you to report and remit unredeemed balances after a dormancy period. Which state's rules apply can depend on the purchaser's address and where your business is incorporated.
The practical lesson is to record the purchaser's address where you can and to ask your accountant whether your gift card balances are reportable. Other countries rarely have equivalent rules for gift cards, but check locally.
How to account for gift cards
Under both US accounting standards (ASC 606) and international standards (IFRS 15), a gift card sale creates a liability, often called deferred revenue or a contract liability. You recognize revenue only when the card is redeemed or when you can reasonably conclude that the remaining balance will not be used.
- At sale. Record the cash received and an equal gift card liability. No revenue yet.
- At redemption. Reduce the liability and record revenue for the amount used, plus any extra the customer paid on top.
- For breakage. If you have reliable history showing that a share of balances is never used, accounting standards generally let you recognize that expected breakage as revenue in proportion to the pattern of redemptions. Without reliable history, you wait until redemption becomes remote. Balances you must hand over to a state under unclaimed property laws are not breakage revenue.
- At reconciliation. Each month, check that your gift card liability in the books matches the total outstanding balances in your gift card system.
Hypothetical example
Suppose a café sells 5,000 dollars of gift cards in December. On its December books, cash rises by 5,000 dollars and a gift card liability of 5,000 dollars appears. In January, customers redeem 2,000 dollars and spend another 600 dollars on top. The café reduces the liability to 3,000 dollars and records 2,600 dollars of revenue. The remaining 3,000 dollars stays as a liability until it is used or treated as breakage under the rules.
Sales tax and VAT
In most US states, sales tax is collected when the gift card is redeemed for taxable goods, not when the card is sold. In the UK and EU, the treatment depends on whether the voucher is single-purpose, where the VAT due is known when it is sold, or multi-purpose, where VAT is accounted for on redemption. Small businesses selling a gift card that can be spent on anything in the shop, with items at different VAT rates, will usually have a multi-purpose voucher. Confirm the treatment with your accountant.
Pro tip
Track the "uplift" on every redemption, meaning how much customers spend above the card value. It shows the true marketing value of your gift card program and helps you decide how much to promote cards next season.
Protecting your business from gift card fraud
Gift cards are attractive to fraudsters because they work like cash. The US Federal Trade Commission regularly warns consumers that anyone demanding payment by gift card is a scammer, and businesses can be targeted too.
- Never activate a card until payment is complete.
- Use unique, hard-to-guess card numbers and, for digital cards, a PIN.
- Watch for unusual bulk purchases, especially online with cards from different names.
- Train staff to refuse requests to buy gift cards for "a manager" or "a supplier" over the phone or email.
- Limit refunds of purchases onto gift cards to prevent stolen goods being swapped for clean value.
Benefits of selling gift cards
- Cash up front with no stock to hold
- New customers when recipients redeem
- Extra sales in quiet months such as January
Responsibilities to manage
- Expiry, fee and cash-back rules that vary by location
- Liability accounting and possible unclaimed property reporting
- Fraud risk if controls are weak
Your gift card setup checklist
- Choose a system that tracks every card, balance and redemption
- Check expiry, fee and cash-back rules for every place you sell
- Write clear terms and print them on the card or packaging
- Set up a gift card liability account in your bookkeeping
- Ask your accountant about breakage, sales tax or VAT and unclaimed property
- Train staff on selling, redeeming and spotting gift card scams
- Promote digital gift cards once shipping cutoffs pass
- Reconcile gift card balances with your books every month
Frequently asked questions
Is gift card money income when I sell the card?
For accounting purposes under ASC 606 and IFRS 15, no. It is a liability until the card is redeemed or treated as breakage. Tax rules can differ from accounting rules in some countries, so ask your accountant how gift card sales are taxed for you.
Can my gift cards expire after one year?
In the US, generally not under the federal CARD Act, which requires at least five years, and some states ban expiry entirely. Australia requires at least three years for most cards. In the UK there is no specific minimum, but terms must be fair and clearly disclosed.
Do I have to give cash back for small balances?
Some US states, including California, require cash back for small remaining balances. Check your state's rules. Elsewhere it is usually optional, but offering it builds goodwill.
What happens to gift cards if my business closes or is sold?
Outstanding gift cards are a liability of the business. In a sale, the buyer and seller usually agree how they will be honored. In an insolvency, cardholders may be treated as unsecured creditors. Plan ahead and be transparent with customers if changes are coming.
Related reading
The bottom line
Gift cards can be one of your most profitable holiday products, as long as you treat them as the promise they are. Track every card, follow the expiry and fee rules wherever you sell, record sales as a liability rather than revenue and protect yourself from fraud. Do that, and every card you sell in December becomes a customer visit you can count on in the new year.
