How should I interpret this tax regulation Sec. 1.471-3(b) with respect to cash discounts?

Sec. 1.471-3(b) Inventories at cost:


In the case of merchandise purchased since the beginning of the taxable year, the invoice price less trade or other discounts, except strictly cash discounts approximating a fair interest rate, which may be deducted or not at the option of the taxpayer, provided a consistent course is followed. To this net invoice price should be added transportation or other necessary charges incurred in acquiring possession of the goods. For taxpayers acquiring merchandise for resale that are subject to the provisions of section 263A, see Sec. Sec. 1.263A-1 and 1.263A-3 for additional amounts that must be included in


inventory costs.








My understanding:





According to this regulation, even when cash discounts approximate market interest, the customer use substantial leeway. The customer may simply recognize the cost as cash paid or deduct the discount as an expense while recognizing a form of interest income.





Thanks





Julio|||Julio,





Your understanding is correct. If the cash discount approximates market interest, you have the option of reducing the cost of the merchandise for inventory purposes or recognizing intererst income. Choose wisely, becuase you must apply the same choice for all merchandise purchases for the life of the company.