How to account for Cash Discounts

[Jesse]

When a cash discount is offered - upon payment for cash basis tax accounting on the Schedule C would you:

-Reduce the sales (income) by the amount of the discount given?

or

-Treat the discount as an other expense on page 2 of the schedule C?

[appelman]

I would reduce income.

But does it really matter? It would be best to be consistent, though.

[spanel]

Wouldnt it already reflect in the total sales, hence no reflection neccesary.


Chris

[Jesse]

Bottom line doesn't matter as the net income would be the same. I am reviewing a return that has cash discounts as an expense on page 2 of schedule C but this is the first time I've seen it done this way. I have always reduced income and was curious as to how others treat the discount.

I suppose I should keep it consistent but to me it just seems odd to treat it as an expense.

[ChEAr$]

Bottom line doesn't matter as the net income would be the same. I am reviewing a return that has cash discounts as an expense on page 2 of schedule C but this is the first time I've seen it done this way. I have always reduced income and was curious as to how others treat the discount.

I suppose I should keep it consistent but to me it just seems odd to treat it as an expense.

You'd done it right then. Proper accounting treatment is to debit a contra account to income along with any returns and allowances resulting in net sales.

[Jiggers]

This assumes that the amount shown for the sales is really the gross sales and not the net cash received.

I have some farmers that total up the net receipts for their cattle sales and then total up the selling expenses that were deducted. They think they are entitled to that expense.

[Roland Slugg]

I would report the gross sales on line 1 and the cash discounts allowed on line 2.

[Gary2]

You'd done it right then. Proper accounting treatment is to debit a contra account to income along with any returns and allowances resulting in net sales.

For those of us who don't do bookkeeping (let alone accounting), this doesn't address the tax question head on - until we check the form and realize that "returns and allowances" is precisely the description of line 2 on the Sch. C.

So one question is why would a discount or allowance go on line 2 instead of being included in line 1? For accounting purposes (i.e., financial analysis), it may be useful to measure the discounts separately. But for tax purposes, when does it matter? It makes sense to report returns separately, because they're separate events (and in particular, a purchase in one tax year might be returned in another). But is there a tax reporting difference between giving a discount for cash and simply putting an item on sale for a day?

Also, I'm pretty sure that there's a difference between expenses taken in Part I of Sch C to calculate gross income and expenses taken in Part II (including those entered in Part V on page 2). I just can't put my finger on when the distinction matters.

[ChEAr$]

Of course the bottom line will be the same no matter where any item lands up on schedule c, 1120, etc.

Conventional wisdom, along with elementary accounting texts, have always treated cash discounts for early payments as a reduction in sales, so even though using a separate account for the books, cash discounts should be netted with gross sales for line 1.

However..... on the accrual method of accounting where every sale is also debited to accounts receivable regardless of when it is collected (it might even actually BE a cash sale), payment on the account will results in a credit to accounts receivable, and debits to cash and cash discounts. This allows proper tracking of course.

Now someone with an MBA in finance would argue that cash discounts should properly be shown as other expenses below net operating income.

Ok, I guess this horse has been beat enough. grin

[BOB W]

Just an added note, Cash Discounts usually are for wholesale/retail financial reporting. Any type of discount for these types businesses are needed to reflect facts that effect gross profit percentage as it relates to sales and to track total discounts issued for any period under review. IRS also wants to know this info when they look at gross profit for the business as it explains, if any, low GP.

Other "non inventory" type businesses have no need to report any type of discount and should just report net cash collected (cash basis). But if the business is on accrual basis accounting and Not an inventory business, it is easier to report all discounts in the bookkeeping function and on their tax return.

[Gary2]

Of course the bottom line will be the same no matter where any item lands up on schedule c, 1120, etc.

The bottom line isn't the issue. The issue banging around the back of my mind is that there are some questions, not directly on the Sch. C, determined by line 7 of the Sch. C. It may just be something dumb like the filing requirement distinction, but I vaguely recall some other, more significant albeit uncommon case. I don't see it in either the retirement plan pub or office in home, and it could just be a figment of my imagination.

The filing requirement distinction is real, but extremely rare, and probably more useful to know for EA or RTRP exams. I'm pretty sure that for the purpose of the general filing requirement, it's line 7 and not simply lines 1 + 6 that's used. But it's rare in practice, because the SE tax filing requirement will almost always kick in.