Obtaining most advantageous treatment for trade discounts.

• Author: Bulmer, Mark D.
• Position: Brief Article

Trade discounts may be significant for many taxpayers, especially large retailers. While these discounts are often reported as "other income," they should reduce the invoice price of merchandise purchased during the tax year; see Regs. Sec. 1.471-3(b) and Rev. Rul. 84-41. Nevertheless, many taxpayers believe that it makes no difference whether the discounts are reported as other income or as an inventory adjustment (and thus reflected in the cost of sales).

Of course, trade discount income is reported either way. However, the time when this income is recognized may change - depending on whether the discounts are reported as other income (and included in the current year's taxable income) or treated as an inventory adjustment, in which case the income is not recognized until the inventory is sold (if the FIFO inventory method is used).

A FIFO taxpayer currently reporting these discounts as other income may find an accounting method change beneficial. There could be...