How to Categorize & Expense paid Fed/State taxes?

snipped-for-privacy@gmail.com wrote in news: snipped-for-privacy@googlegroups.com:

I created subcategories of Tax -- Tax:State Pay & Tax:Fed Pay (to differentiate from the witholding).

If you want to treat it by strict accounting rules, you should search this forum for RC White's detailed explanation of this whole topic, which is muc h more involved than it appears. The essence is that you want to correlat e the taxes paid, whether from withholding, estimates, or at filing, with t he year they apply to. Before you make the final payment (or get a refund) any payments are actually an asset, not an expense (I know, it feels like an expense).

I'm not going to try to describe the details of the process because RC's ex planations, which he invariably has to reiterate every year for those of us who are either new to the topic or can't keep it straight (like myself), i s the best thing to read.

Hi, Jo.

Thanks for the kind words. But Lerner's post apparently is not about the usual situation, so perhaps it can be handled more simply.

First, "they are not a withholding". So this seems to be a straightforward payment of the total tax in a single lump sum, just like paying the monthly water bill. It can be charged directly to a Category such as Tax Expense. We don't have to deal with temporary asset accounts, such as Prepaid Tax (by whatever name). The Quicken entry could be back-dated to December 31, but then the bank reconciliation would have to be handled carefully.

Second, if this is handled on a pure Cash Basis of accounting, it can be treated as an expense "when paid", rather than relating it to the year that earned the income being taxed. So Lerner can let Quicken record it as an expense of the current year..

I am more comfortable with accrual basis accounting, which tries to match income and expenses chronologically, but many people use and understand the simpler (?) cash basis. Their water bill is recorded as an expense when paid, even though the water was used a month or two ago. (I handle my utility bills that way.) If Lerner is happy with that, I won't insist on "my way" of handling his/her books.

RC

-- -- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken Deluxe 2015 R4 and Windows Live Mail in Win8.1 x64)

If you want to treat it by strict accounting rules, you should search this forum for RC White's detailed explanation of this whole topic, which is much more involved than it appears. The essence is that you want to correlate the taxes paid, whether from withholding, estimates, or at filing, with the year they apply to. Before you make the final payment (or get a refund) any payments are actually an asset, not an expense (I know, it feels like an expense).

I'm not going to try to describe the details of the process because RC's explanations, which he invariably has to reiterate every year for those of us who are either new to the topic or can't keep it straight (like myself), is the best thing to read.

Thanks for all of your explanations. I set it up as an expense since they are not witholdings