OTHER

Returns and Discounts

Often times entrepreneurs do not end up charging full price on every product and / or service they sell. If you accept returns, or otherwise discount your products as part of a promotion or concession to a dissatisfied customer, these amounts could be deductible on your Schedule C (assuming your gross sales do not already exclude these amounts).

REAL ESTATE AGENT

Kathleen is a Santa Fe, New Mexico based real estate agent who earlier this year sold a fixer-up home to a newlywed couple. She earned $10,000 of commission income from this sale but unfortunately her clients were unhappy with the home. Although Kathleen was under no obligation to return any of her commission, she felt personally responsible for their dissatisfaction and gave them back $2,000. When Kathleen prepares her tax return, she should report the full $10,000 of commission income as part of her gross sales and deduct separately the $2,000 refund on line 2 of her Schedule C.

ENTREPRENEUR

Anoush is the creator of an popular game in the app store. To help his app gain popularity, earlier this year when he launched he offered the first 5,000 downloads for free. Ordinarily his game is priced at $2.99. Last year Anoush had 500,000 downloads. He would want to record $1,495,000 (500,000 downloads x $2.99 each) of gross sales on line 1 of his Schedule C and $14,950 (5,000 free downloads x $2.99 discount) of discount allowance on line 2 of his Schedule C.

ENTREPRENEUR

Dee sells handmade silverware on Etsy. Earlier this year she mistakenly shipped out $800 of defective products, which were subsequently returned and refunded. When Dee prepares her Schedule C she intends to report her gross income net of all returns. Because she will be reporting her gross sales net of the $800 refund, she would not also deduct the refund on line 2 of her Schedule C.

ARTIST

Elana is an independent artist who has a small business producing locally themed print screen t shirts she then sells to retailers around town. Last year, she mistakenly sold $500 of custom t shirts with the wrong design to one of her best customers. To maintain her relationship with this customer, she allowed them to return the shirts and she issued them a full refund. When Elena prepared her Schedule C she reported her gross sales before all refunds. Accordingly, she would be allowed to deduct the $500 return / refund on line 2 of her Schedule C because it was not already deducted as part of her gross sales.

AUTHOR / SPEAKER

Charles is a retired politician who spends his golden years giving speeches on foreign policy. Recently, there was an opportunity to speak at an event organized by the United Nations. Since Charles knew securing a speaking engagement at this venue would provide him with excellent exposure, he discounted his normal $12,000 fee by 25% and only charged the event organizer $9,000. When Charles prepared his tax return he included the net $9,000 fee as part of his gross sales. Because he reported his gross sales net of the $3,000 discount, he would not deduct the discount as an allowance on line 2 of his Schedule C.

SECTION 179 INSTRUCTIONS

  • If you gave a cash or credit refund to a customer after they returned a damaged, defective or unwanted product it would be considered a return.
  • If you gave a discount, rebate or otherwise reduced the purchase price of your product or services as part of a promotion or due to quality issues it would be considered an allowance.
  • If you report your gross sales net of refunds and allowances on line 1 of your Schedule C, do not deduct refunds and allowances again on line 2 of your Schedule C.
  • Note that even though returns and allowances reduce your gross sales, the amount you report on your Schedule C should be a positive number.

No items found.
No items found.