My business partner and I have operated an LLC taxed as an S-corp for the last 4 years in the travel industry.
We have previously primarily received revenue via sales/marketing consulting fees from travel suppliers, and, to a smaller part, commissions on tour sales that we booked.
For 2020, due to the effects of Covid-19 on the travel industry, we have relied more heavily on tour operation as many suppliers had to cut their sales/marketing budgets. This is the first year in which we packaged together our own tours in which we collected gross tour sales payments from travelers, out of which we had to pay all travel suppliers involved who managed the services in each destination. We have accounted this for our own financial statements as Cost of Services as they are specific to each sale, not business overhead. In addition to the travel suppliers' net tour costs, the other categories we accounted for as Cost of Services were commissions we pay to travel agents who book their clients on our tours, and also banking/payment fees (cc processing fees on payments we receive from clients and fees on transfers to travel suppliers).
The question I have is how to handle these "Cost of Services" on our 1120S for tax purposes. Even though we do not have inventory or produce any tangible goods, do we account for these costs on the tax return via (1) COGS (Form 1125-A), (2) under deductions using Line 19 as Other Deductions and provide a statement for any that do not fall under other typical categories, or (3) some other way which I have not considered to reflect our true net income?
On this same topic of this new income source, is it important to note any client refunds under Returns and Allowances even though, again, this does not involve any physical products/goods? We did have client trips cancelled due to Covid-19 and refunds provided. If this does not need to be listed under Returns and Allowances, do I simply enter our total income (revenue less refunds) on Line 1?
Thank you for your assistance - we want to be sure we thoroughly understand how our shifting business model due to the current crisis affects our tax filing requirements.
Many thanks,
Rob
