For businesses that sell products, if you are filing a Schedule C, returns and allowances include cash or credit refunds you make to customers, rebates, and other allowances off of the actual sales price.
Line 1 of Schedule C is the gross receipts for the business. The returns and allowances amount (line 2) is deducted from your gross reciepts, therefore, the gross receipts amount should include sales that were later refunded/returned by the customer in order to properly report your business's income/returns. Then input the amount of returns and allowances on line 2 to offset the amounts.
