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You have two options.
Option One: For this tax year, you write off the inventory at a loss. Next year, you report the refund as business income.
Option Two: Delay reporting the disposal of your inventory until next year. The refund you receive will offset the loss from writing off the inventory.
As a cash-basis taxpayer, you report income as it is received and expense as they are paid. Although this is a "refund," you would need to report on next year's return because the receipt crossed tax years. But returning the inventory is a non-cash event, so you have a choice on how to report it.
You have two options.
Option One: For this tax year, you write off the inventory at a loss. Next year, you report the refund as business income.
Option Two: Delay reporting the disposal of your inventory until next year. The refund you receive will offset the loss from writing off the inventory.
As a cash-basis taxpayer, you report income as it is received and expense as they are paid. Although this is a "refund," you would need to report on next year's return because the receipt crossed tax years. But returning the inventory is a non-cash event, so you have a choice on how to report it.
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