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If my friend was to buy 5k in Amazon gift cards for himself before the year end knowing that he was going to spend those during the 2019 fiscal year, with the idea that he would be writing this off as business expenses in 2018 to avoid income tax, would he get in trouble if he were audited by the IRS?

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    Which aspect are you concerned about? Is this for a business of his? Are you taking some sort of tax deduction? What is he spending the gift cards on? – Ben Miller - Reinstate Monica Dec 18 '18 at 17:09
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    Gift cards just store money, they don't even prepay sales tax. So it's unclear why you think there would be any interaction with taxes, let alone an illegal one. – Ben Voigt Dec 18 '18 at 18:06
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    If this is related to your previous question please edit so that your intent (using it as a deductible business expense) is clear. – D Stanley Dec 18 '18 at 18:19
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    I have edited your question to reflect what I think you are really asking, based on your previous question and the answer that you accepted. If this edit doesn't really reflect what you want to know, please edit it further. – Ben Miller - Reinstate Monica Dec 18 '18 at 20:19
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It would appear to me that this isn't tax fraud, but I would be aware of how you are going to write this off.

Are they gifts for employees/vendors/clients? In which case, it would be limited to $25 per person: https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-8

You probably won't be able to Section 179 deduct that type of purchase: https://www.irs.gov/publications/p946

I've also read that you're only going to be able to deduct on purchases that would be in the ordinary use of business.

Software developer buying a tractor... probably not going to fly.

Giftcards for your business... if you can justify it.

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    Note that the question was edited after this answer was posted. The edit makes the transaction look much more like tax fraud. – Pete Becker Dec 19 '18 at 14:00
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  • If you (or your friend) buy a gift card, that's not an expense in itself, it is an asset swap: for x money (asset) you get x gift card (asset). The asset swap doesn't change profit and thus doesn't have any influence on taxes.

  • The next transaction is that the gift card leaves the business (the asset is used).
    • If that happens next year when the gift card is used to pay for something (instead of money), that's an expense for the business and treated like any other expense next year. Also, whether and how much is deductible depends on what is bought - and that isn't known when the gift card is bought.
    • If they give it away to some 3rd party, the usual rules whether/which fraction of a gift can be deducted as business expense apply. (In my country they are rather tight and very burocratic. And that's the only point in this list where a difference between gift card and money exists: directly giving money is never tax decuctible).
    • If your friend buys something for themselves, that's a personal draw. I don't know much about US business legislation, but in my country it would depend on how the business is set up how this is handled. I don't think that the treatment differs whether the personal draw is done as gift card or money (or, for the sake of completeness: as goods) though.

Bottom line:

  • profit and taxes are affected in the year when the asset leaves the business and
  • there's no difference between gift card and money (other than the gift card being less liquid) if the gift card is used for business or privately by the owner.
  • In my country, the only scenario where the gift card is treated differently from money (and where it actually does make sense to buy a gift card) is when a 3rd party receives the gift: this may be deductible as business expense / tax deductible whereas handing over the same amount of money is not.
    An example would be giving an employee for their birthday some flowers which is (tax-wise) the same as a florist gift card but handing over the same amount of money is treated as wage.
  • "profit and taxes are affected in the year when the asset leaves the business " this is not true in accrual accounting. You can accrue an expense without a single dollar (or other asset) going out the door. The rest of your answer is spot on, I believe. – D Stanley Dec 19 '18 at 17:38
  • @DStanley: I have to admit that I can speak bookkeeping basically only in German (and limited mostly to what I need for my business), so I'd be interested to learn more about what you said here. I looked up "accrued expense" - it seems to line up with Rechnungsabgrenzungsposten (ha! don't we have cool words!?). That would happen if in the old year I receive some service (or good), but the invoice isn't sent till later in the next year. So with receiving I have the expense, but don't "officially know" its details (for certain). However, at least over here, that wouldn't be the case with the... – cbeleites supports Monica Dec 19 '18 at 18:05
  • ... gift card. The gift card I buy by going into the florist's, saying "I'd like to have a 15 € gift card in birthday design" and exchange 15 € for gift card + bill/receipt. The gift card also has quite exactly that value. Sure, after some 3 years it will loose its value, but other assets break/deteriorate and are written off as well. One loophole (tax-wise) here may be that small assets (e.g. book) can be written off immediately at the end of the year. I'd suspect, though, that the gift card is too money-like to allow that. Like a claim cannot be written off immediately without good reasons. – cbeleites supports Monica Dec 19 '18 at 18:21
  • But maybe in the US you use gift cards that work the way that the florist would send the bill for the flowers to the business after employee went there to get their birthday present? (I doubt it could occur in gift card practice, and I'm also not sure what the consequences would be in terms of accounting as the goods/service has not been received yet. It is for sure something where I for my business would think the burocratic trouble is going to be more expensive than any possible tax savings) – cbeleites supports Monica Dec 19 '18 at 18:24
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    One translation of Rechnungsabgrenzungsposten seems to line up with "accrual", so I think we're in agreement there. I doubt (but am not certain) that the gift card is deductible UNLESS it's used in the same manner as cash on a deductible expense (i.e. gifts to employees or to make a purchase), whic is why I thought the rest of your answer was correct. – D Stanley Dec 19 '18 at 19:50

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