You deduct it as a business expense in 2017. This can appropriately be reported in the "Returns and allowances" section of the Schedule C (right underneath your gross income received), because a chargeback is a form of refund or return.
The reason why you report this in 2017 is that, if you use the cash basis accounting method (the most common accounting method), you count the acivity of what you received and what you spent within the same calendar year. Since the chargeback occurred in 2017, you report it in 2017, even though the income earned against the chargeback was earned in 2016.
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