2 — Returns and Allowances Updated for tax year 2025

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 [SOURCE: 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 [SOURCE: 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.

Related lines on your return

• Line 1 — Schedule C — Gross receipts; the starting number before this subtraction
• Line 3 — Schedule C — Line 1 minus line 2; the adjusted gross receipts figure