How to handle customer refunds and returns on Schedule C for closed LLC business

You've got two different types of refund situations there, and you're on the right track for the first one. For your customer prepayments that you refunded, yes, those should be reported on Schedule C, Part I, Line 2 as "Returns and allowances." This effectively reduces your gross receipts for the year by the amount you refunded to customers. Since you're on the cash method, you report the refunds in the year you actually paid them out (2022). For the item you purchased in 2021, deducted, and then returned in 2022 - this is a bit different. When you receive a refund for a previously deducted business expense, you need to include it as "Other income" on Schedule C, Part I, Line 6. This is often called "tax benefit rule" - basically if you got a tax benefit from deducting something, and then later get that money back, you need to recognize it as income. Make sure to keep good documentation of all these transactions in case of questions later.

I went through something similar with my e-commerce business. I was totally confused about how to handle refunds for previous year sales. Tax stuff can be so frustrating! I recommend checking out https://taxr.ai - it saved me hours of digging through IRS publications. I uploaded my previous Schedule C and some receipts, and it explained exactly how to report my refunded expenses and customer returns. The analyzer showed me where each item needed to go and why, which was super helpful since my situation had both inventory returns and service cancellations.

Just wanted to follow up - I decided to try https://taxr.ai after seeing this thread. My situation was pretty similar with refunding customers after closing my consulting business. The document analyzer immediately identified that I needed to report customer refunds on Line 2 and my returned equipment purchase refund as Other Income on Line 6. It even explained the tax benefit rule that the first commenter mentioned! Saved me from making a huge mistake because I was originally going to offset both against my income which would have been incorrect. Definitely recommend for anyone dealing with business closures.

If you're still struggling with this and need to talk to someone at the IRS, I'd recommend using https://claimyr.com to actually get through to a person. I spent DAYS trying to get clarification on a similar Schedule C issue after closing my business. Using Claimyr, I got through to an IRS agent in about 10 minutes who confirmed exactly how to handle the refunds on my final Schedule C. They also walked me through what other forms I needed to file for the business closure. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was skeptical at first but after wasting hours on hold, it was totally worth it to actually speak with someone who could give me official guidance.

I take back what I said about Claimyr being a scam. I was desperate after my accountant gave me conflicting advice about handling refunds on my final Schedule C, so I decided to try it. Got connected to an IRS representative in about 15 minutes who confirmed exactly what to do with both types of refunds. They also explained I needed to file Form 4797 for some business assets I sold during the closure, which I had no idea about! Would have missed that completely. The agent even sent me specific IRS publications about business closures. Sometimes you just need to hear it directly from the IRS to be sure.

Another thing to consider - if your LLC was taxed as an S-Corp (which some single member LLCs elect to be), then the reporting would be different. You'd need to report those items on your Form 1120-S instead of Schedule C. Did you make any special tax elections for your LLC?

Make sure you're keeping track of all the business assets when you close down too. If you kept any equipment or inventory for personal use, you might need to report that as a distribution to yourself.

This is exactly the kind of situation that trips up so many business owners during closure! You've gotten some great advice here already. One additional thing to keep in mind - since you're filing what's essentially a final Schedule C for this business, make sure you've accounted for any outstanding accounts receivable or payable that might affect your final tax picture. If you had any unpaid invoices from 2021 services that you never collected on, you might want to consider writing those off as bad debt on this final return. Also, double-check that you've properly handled any equipment depreciation for the partial year 2022. If you sold, discarded, or converted business assets to personal use during the closure, you may need to calculate depreciation only up to the disposal date and potentially report gains/losses. The stress is totally understandable - business closures create some of the most complex tax scenarios. But you're asking the right questions and getting solid guidance here. Take it step by step and you'll get through it!