How to record Fed tax refund applied to estimates

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

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