:

How to record Fed tax refund applied to estimates

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
Reply to
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
 Click to see the full signature
Reply to
R. C. White
mated
he
s
n
e
you
7
en
y
or
ax
to
s for
, you
nce
,
es
rly
ments
are
t
01)
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?
Reply to
jo
Hi, Jo.
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.
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
 Click to see the full signature
Reply to
R. C. White
id
harge
axes
,
.
y get
st
ting
01)
to
r the
it's
s
have
8,
n
been
ull
e for
8
nt
unts
hat,
eld
d
008,
ey
.
n
to
of
rly
in
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".
Reply to
jo

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.