For customer discounts on Schedule C - record as reduced income or expense? Which expense line?

You have the flexibility to handle customer discounts either way, and both approaches are acceptable for tax purposes. Most small businesses find it easiest to just record the net sales (after discount) as gross income since that's the actual amount received, which simplifies bookkeeping. If you prefer to record the full amount as income and then take the discounts as an expense, you would list these on Schedule C Line 48 "Other expenses." You'd need to attach a statement detailing what these expenses are (customer discounts). This approach gives you more visibility into the full value of your goods versus the discount amount, which some business owners prefer for analytical purposes. The "Advertising" category wouldn't be appropriate here since these are direct price reductions to customers, not promotional expenses. Just make sure whatever method you choose, you're consistent with it throughout the tax year.

I was in the exact same situation with my Etsy shop last year. I tried to figure out the "right" way to do this and eventually found a solution that worked great for me. Check out taxr.ai (https://taxr.ai) - I uploaded my sales records there and it instantly showed me how to properly categorize my discount structure on Schedule C. The site has this really cool feature that analyzes your specific business type and recommends the optimal method for your situation. For me, they suggested separating gross sales from discounts since my discount percentage varied so much by product type. This approach gave me much better insights into which product lines were actually profitable after discounts. The site let me download reports formatted exactly for Schedule C that I could just hand to my accountant.

Just wanted to update about using taxr.ai after seeing it mentioned here. I took a chance and uploaded my messy spreadsheets from my T-shirt business, and wow - it actually organized everything perfectly! It showed me that for my business type, recording net sales was simpler but I was missing out on tracking discount effectiveness. The report it generated showed I was giving way too many discounts on my lowest-margin products. After reorganizing my discount strategy based on the analysis, I'm already seeing better profitability this quarter. It even auto-categorized all my jumbled expenses correctly for Schedule C, which saved me hours of work. Definitely worth checking out if you're struggling with the discount tracking question!

If you're spending hours trying to get clarification on Schedule C questions like this discount issue, I'd highly recommend using Claimyr (https://claimyr.com) to actually speak with an IRS agent directly. I was going back and forth on proper expense categorization for months and ultimately decided I needed to hear it straight from the IRS. I was dreading the infamous hold times but found Claimyr which basically calls the IRS for you and then connects you once an agent is on the line. They have a great demo video showing how it works: https://youtu.be/_kiP6q8DX5c. I got through to a really helpful IRS representative in about 20 minutes instead of the 3+ hours I spent on my previous attempt. The agent explained that either method for recording discounts is acceptable as long as I'm consistent, but also pointed out some industry-specific guidance I had no idea existed for my business type.

I need to apologize and correct myself about Claimyr. After posting my skeptical comment, I decided to try it myself since I've been trying to reach the IRS about a business tax question for weeks. I'm genuinely shocked - it actually worked exactly as described. I got a call back in about 45 minutes, and it was 100% a real IRS agent on the line. She was able to look up my business tax records and everything. I asked specifically about this Schedule C discount issue since I was curious too, and she confirmed that Line 48 "Other expenses" is indeed where customer discounts should go if you're recording them separately from income. She also mentioned that you need to include a statement clarifying what's included in that line if you go over a certain amount. Saved me hours of hold time and got a definitive answer. I was completely wrong in my skepticism and wanted to set the record straight.

Just to add another perspective - I'm a bookkeeper for several small businesses, and we almost always record sales net of discounts (the after-discount amount). It's simpler and accomplishes the same thing tax-wise. The only businesses I recommend tracking discounts separately are: 1) Retail businesses with complex discount programs that need to analyze discount effectiveness 2) Businesses where employees or managers can give discretionary discounts that need oversight 3) Businesses with significantly different discount rates across product lines For a small jewelry business, unless you're doing complex discount analysis, the simpler approach of just recording net sales is probably best.

I always thought the advertising expenses line would make sense for discounts since technically the point of discounts is to bring in more customers? I've been putting mine there for years and never had an issue with the IRS... am I doing this wrong?

Just wanted to share what happened with my craft business - I started recording everything as net sales, but when I started doing significantly more volume, my accountant suggested separating the discounts as "Other expenses" with a clear description. This actually helped me realize I was giving way too many discounts on certain product categories! By seeing the total discount amount separately on my Schedule C, I made some pricing adjustments that increased my profits by almost 15% the next year. So while tax-wise it makes no difference, the business insight from separating them out can be really valuable!

Great discussion everyone! As someone who's dealt with this exact issue, I'd recommend starting with the simpler net sales approach (recording after-discount amounts) unless you have a specific business need to track discount patterns. One thing I learned the hard way is that if you do choose to separate discounts as "Other expenses," make sure to keep detailed records of what constitutes those discounts. During an audit, the IRS will want to see that these are legitimate customer discounts and not other types of expenses that got lumped together. Also, whatever method you choose, stick with it consistently throughout the tax year. Switching methods mid-year can create complications and potentially trigger questions from the IRS. QuickBooks actually has good reporting features for either approach if you set up your accounts properly from the start.