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Cash and Trade Discount Consulting

Since 2001, SourceCorp has helped businesses across the nation pay less tax with its cash and trade discount consulting service. As a result of this specialized offering, many companies have received negative §481(a) adjustments of three to five percent of total inventory costs!

What is Cash and Trade Discount Consulting?
If a business currently capitalizes cash discounts, vendor allowances or other volume related trade discounts a significant tax benefit may be available. Simply put, by removing cash and trade discounts from the cost of ending inventory, companies increase current year Cost of Goods Sold (COGS) and defer income recognition until those items in ending inventory are sold.

Also referred to as the “net method”, SourceCorp’s consulting service identifies the applicable cash and trade discount programs, quantifies the amount of discounts attributable to year ending inventory and prepares all IRS correspondence necessary to change the way for which they are accounted. In addition to the above, our service includes:

- Form 3115 preparation
- Negative 481(a) adjustment calculation
- Resulting adjustment to LIFO layers (if on LIFO)
- Assistance with year-end adjustments
- Cash and Trade Discount Annual Look-up service (optional)

What are Cash and Volume-Related Trade Discounts?
Defined in Revenue Procedure 2002-9:

Cash discounts are “discounts granted for timely payment”

Trade Discounts are discounts “satisfying the following criteria:
(a) the taxpayer receives or earns the discount solely as the result of the purchase of the merchandise to which the discount relates;
(b) the taxpayer is neither obligated nor expected to perform or provide any services in exchange for the discount; and
(c) the discount is not a reimbursement of any expenditure incurred or to be incurred by the taxpayer.”

Examples of Cash and Volume-Related Trade Discounts
- Early payment discounts such as 2/10 net/30 (2% discount when paid before 10 days)
- Vendor allowances
- Sliding scale percentage discounts based on the quantity purchased

Where Do Cash and Volume-Related Trade Discounts Show Up?
- Vendor invoices
- Manufacturer and supplier statements, memos, etc.

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