The Internal Revenue Service is conducting an outreach campaign to the entertainment industry regarding the taxability of gift bags and promotional items. This effort is focused on distribution of celebrity gift bags and goodie bags in conjunction with appearances by the stars at award shows and other gatherings. Here are some commonly asked questions:
Q: What are the federal income tax consequences to a person who accepts a gift bag in recognition of involvement in an awards show?
A: In general, the person has received taxable income equal to the fair market value of the bag and its contents and must report that amount on his or her federal income tax return.
Q: What about non-transferable gift certificates or vouchers for trips or personal services included in gift bags?
A: If the person accepts and redeems the non-transferable certificates or vouchers in the gift bag, the recipient must include the fair market value of the trip or personal service on his or her federal income tax return.
Q: If these are gifts, why do they have to be treated as income?
A: These gift bags are not gifts for federal income tax purposes because the organizations and merchants who participate in giving the gifts bags do not do so solely out of affection, respect, or similar impulses for the recipients of the gift bags.
Q: Can the recipient take a charitable contribution deduction if he or she contributes the gift bag to charity?
A: If the gift bag is donated to a qualified charitable organization, the recipient may be able to take a tax deduction for his or her charitable contribution, subject to applicable limitations and requirements. But this does not change the taxability of the value of the items. The fair market value must still be reported on the celebrity recipient’s federal income tax return.
Q: Are there third-party reporting requirements for the distribution of gift bags?
A: Yes. Organizations or vendors involved with gift bag distribution should review Form 1099-MISC, Miscellaneous Income, instructions to determine proper reporting responsibilities.
Q: What are the federal income tax consequences to a person who makes selections at a free shopping room in recognition of involvement in an awards show?
A: In general, the person has received taxable income equal to the fair market value of the selections that he or she made at the free shopping room, and must report that amount on his or her federal income tax return.
Q: Does the IRS have an enforcement effort underway in this area?
A: There is no specific enforcement initiative underway in this area at this time. This is currently an outreach and education effort. However, these issues can arise during individual examinations of tax returns.