What this line means
The total amount of refunds, returns, rebates, and allowances you gave to customers during the year. This reduces your gross receipts on line 1. If a customer returned a product and you issued a refund, or you gave a discount after the original sale, those amounts go here.
Does this apply to you?
- You sell physical products and accepted returns from customers during the year
- You issued refunds or credits to clients for unsatisfactory work
- You gave post-sale discounts or allowances on previously invoiced amounts
- You sell on platforms like Amazon or Etsy where customer returns reduced your payouts
Easy to overlook
Platform-adjusted payouts already include returns If you sell on Amazon or Etsy, your 1099-K or seller dashboard payout already reflects returns and refunds. Entering the gross sales on line 1 and then separately deducting returns on line 2 is correct — but only if you used gross sales on line 1. If you used the net payout figure from the platform on line 1, entering returns again on line 2 double-counts the deduction. 1 IRS Schedule C instructions — Line 2
Chargebacks count as returns When a customer disputes a credit card charge and the card company reverses the payment, that chargeback is a return for Schedule C purposes. Track chargebacks separately from voluntary refunds so you capture the full amount here. 2 General filing pattern — omitted refund adjustments
Watch out for this
Double-counting returns when using net payout figures from selling platforms. If your 1099-K shows $50,000 and that already reflects $3,000 in returns, putting $50,000 on line 1 and $3,000 on line 2 is correct. But putting $47,000 on line 1 (the net payout) and $3,000 on line 2 understates your income by $3,000 — the IRS sees the $50,000 on the 1099-K and flags the mismatch.
Footnotes
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IRS Schedule C (Form 1040) Instructions, Line 2. https://www.irs.gov/instructions/i1040sc ↩
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IRS Schedule C (Form 1040) Instructions. See also IRS Publication 17, Your Federal Income Tax. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩