How to record Fed tax refund applied to estimates


J

jo

In April 2008, I had a refund due that I applied to my first and
second quarter estimates for 2009. How do I record this in Quicken
(so that my tax reports look closer to reality and I have a clear
record of what happened to refresh my memory, rather than having to
refer back to the 1040).

I'm pretty sure I know how to create a payment that gets credited to
the proper estimated taxes category but what would be the source of
this money? Seems like I'm missing one or more "dummy" transactions of
some sort to create what I want but I can't figure it out.

Related to this, is there a "good" way to record the 4th quarter tax
payment made in January so that it is reflected in reports that are
run for the current year? I've been either making that payment early
or faking the date (12/31xx) just to get the information to show up in
yearly "P/L" reports (I treat my entire financial activity as if I
were a business).

Thanks,

jo
 
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R

R. C. White

Hi, Jo.
I'm pretty sure I know how to create a payment that gets credited to
the proper estimated taxes category
No. In Quicken-speak, a "category" is an income or an expense. Estimated
tax payments are not an expense. They are simply deposits against a
probable future expense. Until you file your return, neither you nor the
IRS know whether you will have any tax expense at all. Until then, it's
still your money. So it belongs in an asset account, not an expense
category.

At December 31, 2007, you should have had your 3 estimated tax payments in
your Prepaid Tax account. In January 2008, your 4th payment should have
been added to that account. When you filed your return in April 2008, you
should have reduced that prepaid balance by the amount of your actual 2007
tax, leaving the amount of your 2007 refund showing as a receivable, an
asset. Even though the entry can't be made until the tax amount has been
calculated, the entry should be dated 12/31/07; it should record the full
amount of tax for the 2007 year to the Federal Income Tax Expense category
and credit that amount to Prepaid Tax, leaving the amount of your 2007
overpayment as the balance in the prepaid account. Payments you make for
2008 should add to that asset balance, ready to be applied to your 2008 tax
in April 2009.

You don't really have to make any entries to apply your 2007 overpayment to
2008 estimates. You MAY create separate asset and/or liability accounts for
each tax year, but it seems a pointless exercise to me. If you do that, you
would make a non-cash entry each quarter to move some of the prepaid balance
for the 2007 account to the 2008 account.

For those "reading over our shoulders" and who have income taxes withheld
from your paychecks, those withheld amounts should also go into prepaid
taxes (or a FIT Withheld account) and be applied to your actual tax
liability in the same way as for estimated tax payments. In April 2008,
after recording the actual 2007 tax expense and reducing your prepaid taxes
by that amount, you should still have a small balance representing the early
2008 withholdings.

Profit and loss reports should show actual tax expense amounts. Prepayments
(whether by withholding or estimates) should remain as assets until they are
applied to pay on tax liabilities; they should appear in the balance sheet
(Statement of Financial Condition), rather than in P&L (Statement of
Income).

RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
(e-mail address removed)
Microsoft Windows MVP
(Using Quicken Deluxe 2009 and Windows Live Mail 2009 1202 in Win7 x64 6801)
 
J

jo

Hi, Jo.


No.  In Quicken-speak, a "category" is an income or an expense.  Estimated
tax payments are not an expense.  They are simply deposits against a
probable future expense.  Until you file your return, neither you nor the
IRS know whether you will have any tax expense at all.  Until then, it's
still your money.  So it belongs in an asset account, not an expense
category.

At December 31, 2007, you should have had your 3 estimated tax payments in
your Prepaid Tax account.  In January 2008, your 4th payment should have
been added to that account.  When you filed your return in April 2008, you
should have reduced that prepaid balance by the amount of your actual 2007
tax, leaving the amount of your 2007 refund showing as a receivable, an
asset.  Even though the entry can't be made until the tax amount has been
calculated, the entry should be dated 12/31/07; it should record the full
amount of tax for the 2007 year to the Federal Income Tax Expense category
and credit that amount to Prepaid Tax, leaving the amount of your 2007
overpayment as the balance in the prepaid account.  Payments you make for
2008 should add to that asset balance, ready to be applied to your 2008 tax
in April 2009.

You don't really have to make any entries to apply your 2007 overpayment to
2008 estimates.  You MAY create separate asset and/or liability accounts for
each tax year, but it seems a pointless exercise to me.  If you do that, you
would make a non-cash entry each quarter to move some of the prepaid balance
for the 2007 account to the 2008 account.

For those "reading over our shoulders" and who have income taxes withheld
from your paychecks, those withheld amounts should also go into prepaid
taxes (or a FIT Withheld account) and be applied to your actual tax
liability in the same way as for estimated tax payments.  In April 2008,
after recording the actual 2007 tax expense and reducing your prepaid taxes
by that amount, you should still have a small balance representing the early
2008 withholdings.

Profit and loss reports should show actual tax expense amounts.  Prepayments
(whether by withholding or estimates) should remain as assets until they are
applied to pay on tax liabilities; they should appear in the balance sheet
(Statement of Financial Condition), rather than in P&L (Statement of
Income).

RC
--
R. C. White, CPA
San Marcos, TX
(Retired.  No longer licensed to practice public accounting.)
(e-mail address removed)
Microsoft Windows MVP
(Using Quicken Deluxe 2009 and Windows Live Mail 2009 1202 in Win7 x64 6801)








- Show quoted text -
R.C,

I would never have thought of doing it that way. Always interesting to
see how a real accountant treats this stuff. I only know enough to be
dangerous. The only problem I have with it is that by not showing the
estimated taxes as an expense, I'm distorting my cash flow, aren't
I? How exactly do I "move" money to the asset account? Doesn't one
buy an asset?
 
R

R. C. White

Hi, Jo.
The only problem I have with it is that by not showing the
estimated taxes as an expense, I'm distorting my cash flow, aren't
I?
No, your cash flow is exactly the same whether the cash is flowing out
forever, like an expense, or flowing into a non-cash asset, such as prepaid
taxes.
How exactly do I "move" money to the asset account? Doesn't one
buy an asset?
Write a check. Instead of charging it to the Tax Expense "category", charge
it to the [Prepaid Taxes} "account". Quicken will consider this a
"transfer" from one asset (cash) to another asset.

Prepaid taxes, whether paid by withholding or by a check or by applying a
refund, are your assets. Until the cash prepayment is applied to pay taxes
(or refunded to you), it is still YOUR money. The IRS won't pay you
interest on it, and they won't give it back to you except in certain ways,
but it is still your money - your asset - until it is refunded or applied.

In a way, it is much like writing a check to buy a CD. You can't easily get
that back, either, until it matures, but it is NOT an expense. It's just
your own money transferred into a different pocket. But instead of letting
the bank hold it, you are letting the IRS keep it for a while, until the
actual tax comes due.

RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
(e-mail address removed)
Microsoft Windows MVP
(Using Quicken Deluxe 2009 and Windows Live Mail 2009 1202 in Win7 x64 6801)
 
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J

jo

Hi, Jo.
The only problem I have with it is that by not showing the
estimated taxes as an expense, I'm distorting my cash flow, aren't
I?
No, your cash flow is exactly the same whether the cash is flowing out
forever, like an expense, or flowing into a non-cash asset, such as prepaid
taxes.
How exactly do I "move" money to the asset account? Doesn't one
buy an asset?
Write a check.  Instead of charging it to the Tax Expense "category", charge
it to the [Prepaid Taxes} "account".  Quicken will consider this a
"transfer" from one asset (cash) to another asset.

Prepaid taxes, whether paid by withholding or by a check or by applying a
refund, are your assets.  Until the cash prepayment is applied to pay taxes
(or refunded to you), it is still YOUR money.  The IRS won't pay you
interest on it, and they won't give it back to you except in certain ways,
but it is still your money - your asset - until it is refunded or applied..

In a way, it is much like writing a check to buy a CD.  You can't easily get
that back, either, until it matures, but it is NOT an expense.  It's just
your own money transferred into a different pocket.  But instead of letting
the bank hold it, you are letting the IRS keep it for a while, until the
actual tax comes due.

RC
--
R. C. White, CPA
San Marcos, TX
(Retired.  No longer licensed to practice public accounting.)
(e-mail address removed)
Microsoft Windows MVP
(Using Quicken Deluxe 2009 and Windows Live Mail 2009 1202 in Win7 x64 6801)




I would never have thought of doing it that way. Always interesting to
see how a real accountant treats this stuff. I only know enough to be
dangerous. The only problem I have with it is that by not showing the
estimated taxes as an expense, I'm distorting my cash flow, aren't
I?   How exactly do I "move" money to the asset account? Doesn't one
buy an asset?- Hide quoted text -
- Show quoted text -
Interesting. I'll play with it and see what it does to my P/L
reports. I've always wondered if tax payments should be considered an
expense when some financial advisor asks you what you need to live on,
and realized that there was something not quite right in my thinking
and treatment of them. However, it still is outgo, altho a kind of
best guess/estimate at what your real expense will be , and if it was
not mentioned in some way to said advisor, wouldn't it create a false
picture of income needed to cover your life? While I see what you
mean about it not being an expense from an accounting perspective, one
still has to come up with money to write the check. I've always
valued your comments R.c., in case I've never mentioned it before.
You're a "wise head"<g>.
 

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