That’s Ch J-elect Patrick J. (“Scholar Pat”) Urda’s advice to David Nwafor, T. C. Memo. 2025-27, filed 3/26/25. But if Dave nevertheless and notwithstanding the foregoing chooses to do so, let him not take a “returns and allowances” deduction for his self-deducted reduction in his bills for engineering services, especially when he never credited or refunded the self-deductions to his clients.

“To stay competitive, Mr. Nwafor applied a flat discount to [Dave’s box-checked LLC]’s prices for ‘engineering service[s]’ at the beginning of both [years at issue]. Specifically, [Dave’s box-checked LLC] lowered its prices (from those Mr. Nwafor ostensibly first contemplated for each year) by 11% in [Year On] and 6.5% in [Year Two]. These price adjustments were internal, and [Dave’s box-checked LLC]’s customers were unaware that they were being charged a lower rate.”  T. C. Memo. 2025-27, at p. 3.

Ch J-elect Scholar Pat is not amused.

“Mr. Nwafor is not entitled to reduce [Dave’s box-checked LLC]’s gross sales by either the general discounts or the customer-specific allowances claimed. As to the former, Mr. Nwafor testified that he applied ‘discounts’ at the beginning of the year when setting the rate for [Dave’s box-checked LLC]’s services for the year. As we understand it, he decided upon prices that seemed attractive, even if they were less than what he believed [Dave’s box-checked LLC]’s work to be truly worth. The discounts thus were already incorporated in the lower sale prices charged just as if [Dave’s box-checked LLC] had charged the higher rate and then applied, for each customer, returns and allowances. No netting thus is required.

“Mr. Nwafor likewise fails to show that he is entitled to reduce [Dave’s box-checked LLC]’s gross sales by customer-specific discounts. Mr. Nwafor did not testify as to the amounts of any such discounts and did not offer any substantiation whatsoever. And our review of the total amounts of returns and allowances, combined with Mr. Nwafor’s testimony regarding the generalized discounts, leaves us with considerable doubt whether any customer-specific discounts were reported.” T. C. Memo. 2025-27, at p. 10.

A business can net returns and allowances when it has been paid (or accrued) list price, but has had to credit or refund all or part thereof in same year. But Dave’s returns and allowances existed only in his mind.

Dave also tried to deduct the value of his labor in devising a computer program to aid his engineering. That’s the old protester “basis in own labor” dodge. Of course, if Dave picked up the worth of his labor as income, then the “paid or accrued expense” leg of Section 162 would save the deduction. Except he didn’t.

The rest is the usual expenses unsubstantiated or paid in wrong year.