§458 Magazines, Paperbacks, and Records Returned After the Close of the Taxable Year

Summary

You can choose not to count income from the sale of magazines, paperbacks, or records if you use accrual accounting and the items are returned before the end of a set return period. A “magazine” means periodicals, a “paperback” means a flexible-cover book (not a magazine), and a “record” means a disc, tape, or similar item with recorded sound. A sale counts only if you had a legal duty at the time of sale to reduce the price if the item isn’t resold, and you actually make that price adjustment because it wasn’t resold. The excluded amount is whatever is smaller: the amount covered by your legal duty or the amount you agreed to adjust before the return period ends. The return period is 2 months and 15 days after year end for magazines, and 4 months and 15 days for paperbacks and records, but you may choose a shorter period. You may use written proof instead of getting the physical item back if the IRS accepts it, and if you buy the item back yourself that counts as a price adjustment, not a resale. To use this rule you must make an election for the trade or business involved, filed by the tax return due date (including extensions). The election applies to all qualified sales in that business and stays in effect for later years unless the IRS agrees to end it. For magazines, any income drop from switching methods is spread over the election year plus four more years. For paperbacks and records, you set up a suspense account instead of using the usual adjustment rules. The account’s opening balance is the largest dollar amount of returned items that would have counted in any of the three prior years if this rule had applied, and each year you adjust the account and include or exclude that amount from income as required.