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USA 2017 tax question here. My wife has closed out her sole-proprietorship retail business last year, and as her arm chair accountant it falls to me to figure out her gains/losses.

She was able to return her entire stock of inventory to the wholesaler at her cost of purchase (I know, right?). I have been doing cash accounting using cost to track inventory value.

My questions, given her retail markup was about 100%:

  1. If she sold something at a discount from retail, is that realizable as a sales allowance re: Line 2 of the Schedule C?

    From the 2017 instructions:

    A sales allowance is a reduction in the selling price of products, instead of a cash or credit refund.

  2. If so, is there a sales allowance loss for her return of her retail merchandise in terms of her supposed loss from market value to wholesale? This would be a very big loss if it were allowed.

It feels like the fair answer to both of these questions is no, since the loss isn't truly realized because she got the wholesale value of what she paid for back. Also, this could create a weird loop where you could just buy stuff for wholesale, return it immediately, claim a loss, and rinse and repeat indefinitely.

That said, I couldn't find a straight answer online and the IRS pubs are vague so I figured I'd ask; might be useful to others.


TL;DR: I buy some stuff for $100. I sell half of it for $100, realizing a $50 profit and pay taxes on that profit. Next week I decide to sell the remainder back to the guy/gal I bought if from for $50. Did I accrue a $50 loss from a sales allowance?

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