How to deal with use tax?

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So basically Is there a way to deal with use tax? Basically i buy everything untaxed and when i sell the item i then collect the tax however there are times i have to use a item for personal use or business use or the supplier i get it threw just always does not charge me tax so i must pay the tax on it on a separate line when i fill out my sales and use tax form. I have kept it separate from manager completely but it may be easier if it is possible. I did search the forum and found 1 old thread that had some workarounds i didn’t care for but maybe there has been some update since that 3 or 4 year old thread.

I do have one idea and that would be make a sales invoice and just sell the items to myself. would that work?

2

What may seem like a straightforward question to you actually raises several completely different situations.

Background

If you purchased taxable goods on a wholesale basis, meaning you did not pay sales tax to the supplier, the end user must ultimately pay sales or use tax. (They are actually different aspects of the same tax in Nebraska.) This end user could be:

  • Your customer — If you sell the goods onwards, your customer is the end user. You collect sales tax from the customer on behalf of the state tax authority and periodically remit that tax with your sales and use tax filing.
  • Your business — If you end up using the goods for your business, such as an oil filter installed in your business vehicle, your business is the end user and must pay the use tax when you make your sales and use tax filing.
  • You personally — If you divert goods from the business, for example by installing an oil filter purchased wholesale in your personal vehicle, you become the end user and you must pay either sales or use tax in some manner.

For the discussion below, I will assume you understand the first situation because you asked only about use tax.

Your business pays

If your business becomes the end user, it must pay the use tax. Because you seem to be filing your sales and use tax return quarterly, it could be up to 90 days between converting the wholesale goods to end use and remitting the tax. So you need a way to get the use tax liability into a tax liability account prior to actually paying it.

Do that with a journal entry. Credit a tax liability account for the amount of use tax due. Debit an expense account by the same amount. Be aware that you cannot use the placeholder Tax payable account for this purpose, just as you cannot use it for your regular sales tax code. That placeholder account is non-functional, as explained in the Guide about tax codes. If your tax filing form requires the amounts to be separated, I recommend you establish a separate tax liability account only for use taxes. This will simplify separation of amounts when you are completing the filing form.

The expense account you choose could be one of many, perhaps a vehicle maintenance account, or a taxes paid account, whatever is a suitable place for recording that expense. (Your accountant may have a preference about this.) Understand that the use tax paid on items used in your business is no different from other business expenses. It is only being allocated to a specific expense account for visibility.

When it’s time for your sales and use tax filing, you basically pay the balance of the tax liability account(s). Enter a payment transaction with one line for the amount of sales tax collected from customers and a second line for the amount of use tax. Post each line to its respective tax liability account. (This is why I recommended a separate use tax liability account.)

You pay

If you take items for personal use, payment of the use tax is not a business transaction. It is personal. You must comply with your state’s procedures for personal payment of use taxes.

One simple way to handle this is to convert the use tax back to a sales tax. Just sell the items from the business to yourself, applying the normal sales tax code. In other words, you treat yourself as an ordinary customer. Thus, there is no use tax, but only sales tax, and your business will pay the tax authority. This also takes care of the issue of how to properly reduce expenses claimed by the business. (It’s illegal for the business to claim an expense for a personal use item.) As a business, you can decide to charge yourself as a customer whatever you like. A common approach is to sell to yourself at wholesale cost, adding the sales tax. That way, there is no net effect on profit.

It gets a little beyond the scope of this discussion, but you don’t actually have to pay your business in that situation. You can treat the purchase as a withdrawal of capital from an equity account. The exact accounting entries would depend on your legal form of organization.

Another way to handle the situation is to write off the inventory converted to personal use. The inventory write-off should be posted to an owner’s equity or capital account (again, depending on your form of organization). Manager will post the amount as a debit to the equity account, having the same effect as making a draw.

The problem with the second approach is that it leaves the use tax unaccounted for. You would still have to follow your state’s procedures for paying use tax.

Obviously, the sale to yourself is more straightforward.

1 Like
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WOW again @Tut always a great well done answer. However the reason i am thinking the 2 situations are to be treated as the same is if you look at pages 27 and pages 26 of my sales and use tax at this link https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/education/Form_10%20filing_demo-single_location.pdf On page 27 is the work sheet used to file. On line 2 of that worksheet states “cost of items withdrawn from inventory for personal use or business use” thus forcing me to report personal and business use on form 10 page 26 line 4. So basically the only things that i have to enter is line 1 line 2 and line 4 on form 10 and the rest is calculated for me. I bring this up as i think this may change your idea of how to deal with personal vs business use tax.

Just some more details on how the business works. I do not keep or have any inventory so i do not use inventory at all in manager. I buy every part i need only when it is needed for a job. From what i was told by my old accountant this was normal practice for what i do. There literally is no way i could guess what i might need. Maybe a few oils but that is about it. But if i need oil for a job i am normally getting other parts as well so it is no big deal to just pickup everything at once. Also i do not have any business vehicles at all and claim no vehicle expenses. Basically everything comes to me on a truck either the local parts store truck the UPS, FedEx, USPS, Speedy, or any of the hundreds of truck freight companies. If i do have to use my personal vehicle to pickup something i just do it at no charge or expense claim. In fact my vehicles i use for personal use may not get started in several months and i have to go around with battery chargers to keep them up. lol Wife does all the other type of shopping being she already goes to work in town where my work is just a walk from the house lol Lastly the way my Vehicles are plated they cannot be used as a expense for any business and i cannot charge for use of them. I can either use it for personal or free to help a friend even if it is a business friend or the farm that i also work on again a walk to said farm to. Hence why they rarely get started. I would be lucky if i put 500 miles on my personal vehicle this entire year.

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Let me be clear, @iamlost. The information I have provided so far covers generic guidance on how to use Manager for use tax situations. It is not legal or tax advice. It does not cover Nebraska’s particular procedures.

Your state’s form may have built-in provisions for some of what I described. If so, there are probably alternative approaches that would also be permissible. You need advice about such issues from a qualified local accountant. This forum can help with implementing that advice in Manager.

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Sorry i didn’t expect you to be a tax adviser. I was thinking maybe you know of yet another way and that information i gave could give me a option 3 based on what my accountant tells me. It seems you was thinking they must be separate i am thinking maybe the same and showed why. But now i see the answer is obvious which ever way is legal and my accountant likes. there is no 3rd way. Honestly i wish i could just pay someone to do it all for me and leave me to do the actual work lol

Again sorry. I will try not to ask such obvious questions.

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So after asking the question to the accountant all i got was a “yes”. I have no idea what part of the question yes refers to. So i still have no idea what way legally i have to do it. I also had a unrelated to sales and use tax question on the same email. So it seems the way to do this is go back to paying sales tax on everything i buy and no markup or just close the business and find a job.

@Tut thanks for all of your help! I really do appreciate it.

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@Tut If i Credit a tax liability account for the amount of use tax due. Debit an expense account by the same amount i will have said expense shown before it is actually paid. I think this could run me into a problem? Being i have not actually paid the amount for possibly 90 days and my accountant goes to do the end of the year taxes i then would be claiming a expense i have not actually paid yet. Could you help me understand why this wouldn’t be a problem? Or would it be a problem because i am on a cash basis rather then a actual?

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Exactly, if you are using accrual basis then you have no problem.

Otherwise, if your taxes are prepared on a cash basis you should exclude all costs that haven’t been paid.

Your solution could be as easy as switching your reports to Cash Basis or as burdensome as creating external tax sheets to calculate your tax liability. It all depends on the exact setup you’re using.

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Ok i used my test business and checked the report which i had not done before. The Use tax still shows up on the profit and loss report with it set to cash basis. I had not made a payment yet from the liability account. So my guess is i am misunderstanding something?

Burdensome? I do not see that.

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I’m not sure how you arrived at your use tax liability, but I am assuming that you have then used a Journal Entry to post whatever figures that you arrived at to your books.

That Journal Entry shouldn’t be affected by your choice of Cash vs. Accrual Basis, since it’s not an invoice.

The Cash Basis comes in handy at the stage before you posted the Journal Entry, namely during the time you drew your initial report – based on which you arrived at the tax liability figures to be entered. Then the selection of Cash vs. Accrual Basis makes all the difference.

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I used the instructions Tut provided for business Use tax. His instructions:

" Do that with a journal entry. Credit a tax liability account for the amount of use tax due. Debit an expense account by the same amount. Be aware that you cannot use the placeholder Tax payable account for this purpose, just as you cannot use it for your regular sales tax code. That placeholder account is non-functional, as explained in the Guide about tax codes. If your tax filing form requires the amounts to be separated, I recommend you establish a separate tax liability account only for use taxes. This will simplify separation of amounts when you are completing the filing form.

The expense account you choose could be one of many, perhaps a vehicle maintenance account, or a taxes paid account, whatever is a suitable place for recording that expense. (Your accountant may have a preference about this.) Understand that the use tax paid on items used in your business is no different from other business expenses. It is only being allocated to a specific expense account for visibility."

So using them instructions and yours @Ealfardan “Your solution could be as easy as switching your reports to Cash Basis” Basically as soon as i make the journal entry it shows up under expense when creating a report. As it is right now my next sales and use tax will be next year so it wont be paid until next year. So i couldn’t claim it as a expense this year when i make the journal entry. Now i could simply make the report print it out subtract that use amount for the last 1/4 of the year and give to the accountant but that seems like a unnecessary waist of time and confusion for the accountant why i crossed stuff out and changed amounts by hand.

If it matters all i really use manager for is to make invoices and profit/loss statements for my accountant at the end of the year to do my income taxes. Plus it is a handy tool to see how things are going threw out the year. The bank account does not reflect my actually bank account amount i have never used it for anything in fact i only set up the bank account a few weeks ago to get sales tax setup properly. Yes i went threw every single payment and receipt adding the bank account 1 by 1. My family member originally was handling this stuff till a few weeks ago. Well that went bad and i had to figure it out myself. At that time when he was handling this stuff he was doing all sorts of things wrong including me paying sales tax on top of sales tax and random use tax he just made up to claim it would help keep me from getting audited. So basically i was paying in a lot more sales and use tax then i owed.

Myself i have never used a software for accounting i did everything on paper by hand and never had expenses or sales tax. The way i ran things before the family member got involved is i never marked up anything and paid sales tax on everything that went into a customers machine right when i bought it. So my labor charge was my income. All i had to do was add all labor up and done that was my income for the year.

Lastly i have kept all paper records for everything so i am not 100% dependent on the software. I can always go back to my filing cabinet and add up everything by hand. Not much fun though.