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If a customer gets a refund this year for a product sold last year, can I amend last year's Schedule C to indicate the reduced income and get a refund for tax paid that year?

We have a small business and don't have much income this year, so using that refund to offset this year's taxes isn't very useful.

  • This is an interesting question, larger businesses make allowances for returns to keep revenue figures as accurate as possible, but with a Schedule C business and low volume, you have no way to do that. Hoping a CPA-type can weigh in. – Hart CO Sep 25 '17 at 15:58
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    Do you know if your books are kept on a cash or accrual accounting method? – Peter Cooper Jr. Sep 25 '17 at 20:11
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    We need to know two things: 1) As Peter Cooper Jr. asks, what accounting method do you use? 2) What was the reason for the refund? And we need that to decide: 1) Is it still a fact that you did everything required to earn the money last year? 2) Did you in fact get paid last year? – David Schwartz Sep 25 '17 at 21:05
  • Cash basis. It's a potential warranty issue that may require a refund. – pryoslice Sep 26 '17 at 18:10
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I am not an accountant, but I have a light accounting background, despite being primarily an engineer. I also have a tiny schedule C business which has both better and worse years. I am also in the United States and pay US taxes. I assume you are referring to the US Form 1040 tax return, with the attached Schedule C. However little I know about US taxes, I know nothing about foreign taxes.

You are a cash-basis taxpayer, so the transactions that happen in each tax year are based on the cash paid and cash received in that year. You were paid last year, you computed your schedule C based on last year's actual transactions, and you paid taxes on that income.

You can not recompute last years schedule C based on the warranty claim.

You might want to switch to an accrual accounting method, where you can book allowances for warranty claims. It is more complex, and if your business is spotty and low volume, it may be more trouble than it is worth.

At this point, you have two months to look for ways to shift expenses into next year or being income into this year, both of which help offset this loss.

Perhaps a really aggressive accountant would advise otherwise (and remember, I am not an accountant), but I would take the lumps and move on.

This article on LegalZoom (link here) discusses how to apply a significant net operating loss (NOL) in this year to the previous two years, and potentially carry it forward to the next two years. This does involve filing amended returns for the prior two years, showing this year's NOL. For this to be relevant, your schedule C loss this year must exceed your other W2 and self-employment income this year, with other tests also applied.

Perhaps a really aggressive accountant would advise otherwise (and remember, I am not an accountant), but I would take the lumps and move on.

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