Sales Tax Calculation on Expense Claims

Expense claim entries appear to assume that sales tax is inclusive in each line item amount. I suppose this works when each claim represents the entire gross amount of a single transaction, attributed entirely to a single expense account.

I almost always transcribe paper receipts containing a mix of line items (some personal, some business). Business line item amounts are applied to various expense accounts, some taxable, some exempt. Shop receipts in America almost never display sale tax calculation on each line item.

Have I somehow missed the option or logic for expense claims to declare that amounts are not tax inclusive? Like the checkbox on sales invoices? Would be nice to have a preference option to set the default.

I don’t know about America, but here in the UK if you want to claim VAT (sales tax) you need to get a VAT receipt, not just an ordinary receipt from the shops. Perhaps if you ask for Sales Tax receipts then it will detail the information line by line and you can claim the sales tax back.

I don’t usually deal with expense claims but that would be the approach that I would take.

@ipaqrat, if you are in USA and you are talking about sales tax. As far as I know, sales tax in USA is not refundable. Therefore you shouldn’t be using any tax codes on expense claims.

For now, you will need to manually multiply each line item on receipt by sales tax rate. E.g. if sales tax is 8%, multiply the amount on receipt by 1.08 so you get tax-inclusive amount which you can enter in expense claim.

Ah, of course. [EDITED with actual USE CASE]

Thing is, I need to track total spend, not just deductibles - for two reasons:

  1. We partners pay for things (from equipment to daily necessaries) ourselves and apply that spending to capital accounts. As an LLC (incorporated partnership) it can be meaningful for our personal income taxes to have to-the-cent accounting of our equity stakes.
  2. Without the right tax calculations on expense claims, all the cash flow and P/L’s are off by X percent.

Currently, these crucial reports can only be correct if I spend excruciating time calculating every line item, by hand on a calculator. Before inputting it into an accounting program… No on can think this is OK.

I am not knocking efforts on Manager to date. It’s awesome software. I know you have bigger fish to fry, and I appreciate the breadth, complexity and high quality of the programming.

I think I can find the right factor to use in the Tax Code setups to make it calculate correctly. Interestingly, the one place the tax calculation is NOT relevant to us is in sales invoices: The Commonwealth of Virginia does not collect sales tax on SERVICE sales - and my outfit sells equestrian breeding and equitation services, no merchandise.

Thanx everyone for the quick followups.

Why not try and use a spreadsheet, enter the receipt values in column one, a code in column two and the adjusted value in column 3. Then in the 4th + columns could be used to group expense types
The code could be blank or a % rate. Alternatively you could build up a table of codes.
00 = Personnel item no tax
01 = Personnel item 8% tax
10 = Business expense X no tax
11 = Business expense X 8% tax
20 = Business expense Y no tax
21 = Business expense Y 8% tax

Then by using the Lookup feature you can put formula into the outer columns
Column 7 could have " If col 2 has code 11 then multiple col 1 by table 11 factor - 8%"
By setting up a Master Spreadsheet you could Save AS - Feb. Expenses Partner A etc

Is this really the case? If the sales tax is 8%, then you just need to multiply each amount by 1.08.

How does Quickbooks handle this? Any idea?

OK, @ipaqrat, I promised in a personal message I would explain how this works in the USA. I’m posting my answer on the public forum because several of the non-USA members have made comments that could potentially mislead other readers. These nuances originate with fundamentally different approaches to taxation between jurisdiction.

First, you and your partners are using Expense Claims basically correctly. That is, you are posting expense claims to record the expenditure of personal funds for legitimate company purposes. When you do so, a liability is established because the LLC (a type of company for those not familiar with US terminology) owes money to the partner. You have the choice of reimbursing the partner from a cash or bank account, as you would if the claim were filed by a non-owner employee, or clearing the liability to the partner’s capital account. You’ve obviously chosen the second approach, and I agree that generally makes more sense than the first approach, since things all come out in the wash through your capital draws anyway.

Second, understand that because an expense claim is not a transaction into or out of company accounts. That transaction comes later, when the claim is settled. So the entire business of tax-inclusivity or -exclusivity as normally discussed by other Manager users is moot. The company is neither collecting nor paying tax of any kind on the expense claim.

Third, Manager’s tax-inclusive feature allows one to record transactions where tax is already included in the price. As you know, that is virtually never the case for sales tax in the US. (Typical exceptions are for de minimis purchases such as snacks at a concession stand, where, in some jurisdictions, vendors can quote a tax-inclusive price to simplify change-making.) So you will probably never use the tax-inclusive feature operating in Virginia.

So how do you handle these transactions? To answer that question, you must consider Internal Revenue Service (IRS) rules. Perhaps the most important one is that allowable expenses include applicable sales taxes, freight-in, and installation. For example, the purchase of a $100 item with 6% sales tax and a $15 shipping charge should be recorded as a $121 expense. This is true regardless of whether the purchase is a current year operating expense, a contributor to cost of goods sold, or a depreciable capital asset. (There are some details about expensing items under the de minims safe harbor rule that suggest getting separate invoices for freight-in and installation costs, but that’s another discussion.) So there is no need to record or break out the $100 item, the $6 tax, and the $15 shipping charge separately. Nor should the tax and shipping be charged to separate accounts from the item. That determination should depend solely on the classification appropriate for the purchased item itself. The tax and shipping are allowable expenses (and therefore deductible) if the item is allowable.

Understand the difference between sales tax paid on expensed purchases, business taxes paid, and sales taxes remittable to the state/county/city. The first I have discussed in the preceding paragraph. That sort of sales tax is lumped with the overall expense, so need not be broken out separately on the expense claim. Business taxes paid might include property taxes, inventory taxes, and so forth. They have nothing to do with expensed purchases. And, of course, sales taxes remittable are merely being collected by you on taxable sales and passed along to the taxing authorities. But since services are not taxable in Virginia, you probably collect these seldom, if ever.

You said that you frequently combined personal and business purchases on the same receipt. While that is legally acceptable to the IRS, it is poor practice, mostly because it is cumbersome. You must, in fact, prorate the sales tax to the items in order to allocate it properly. It would be better, even if purchasing things at the same store at the same time, to make two transaction so the receipts are clean. You might extend that philosophy to purchases that will eventually be allocated to different expense accounts, too, though there is no legal need. But again, you will have to prorate sales tax on the copy paper recorded to the Office Supplies account separately from that on packaging tape recorded to the Shipping Supplies account.

Returning to the clearing of expense claims, there is again no reason to worry about the sales tax components. Partner A charged $121 to her personal credit card when special-ordering the item discussed in my earlier example. That constitutes an equivalent contribution of capital, no matter what the company uses that capital for. So the entire amount can be cleared to Partner A’s capital account with a journal entry. No need to break out sales tax separately.

Now, you said in your original post that you allocated businesses expenses to appropriate accounts, “some taxable, some exempt.” I’m not sure what you meant. If an expense is allowable, it is deductible. If the item purchased is actually sales-tax-exempt, no sales tax appears on the receipt for that item. So there is no reason to consider sorting things into different accounts on that basis. Any situations where allowable expenses are not fully deductible (such as meals and entertainment expenses), are handled outside Manager on the tax forms. From an accounting perspective, they were still legitimate business expenses.

Hopefully this has helped. If you have other questions, please ask. And remember, I’m not an accountant, and I am definitely not providing tax or legal advice. I am merely attempting to explain how expense claims can be handled in Manager within the US tax environment. :wink:

I am glad that I don’t deal with the IRS. I know I complain about HMRC but talking to American friends, I think we have a simpler tax system here! :grinning:

Speaking as someone who has had to spend time juggling money around due to lack of finances - I know how difficult it is to keep track of where all the money is. Would it not be simpler to get a company card for all directors and you pay all company expenses on your company card. So much easier to keep track of the money flow!

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@dalacor may be right, depending upon how frequently these expense claims occur. If they happen a few times per year, such as when a rental deposit on new office space is paid or a new printer is purchased, that is fine. And they are conveniently cleared to the partners’ capital accounts. But if you are handling routine office expenses, company business travel, and forth this way, it goes a long ways to simplifying things if banking and credit card transactions are handled via company accounts and cards.

One other topic I did not address in my first response is income taxes. Remember that while the company may pay taxes directly as business expenses, as in the case of my property tax example, your LLC will pay no income tax. The IRS treats multi-member LLC’s like yours as partnerships. All profits or losses are passed through to the LLC members as though they were partners. Indeed, though it may not be rigorously correct to refer to them that way, the distinction is slight in the taxation realm.

Payouts or draws from the capital accounts will be treated first as returns of capital. As such, they are not taxable to the members/partners. If the LLC makes a profit, that profit will be distributed and reported on Schedules K-1 to the various members/partners and taxed as individual income on their personal tax returns. Another argument for business accounts and credit cards is to simplify preparation of the LLC’s partnership return. If you are all claiming expenses, you will have to sort that out at tax time. Manager will certainly do this for you, but it seems much simpler to be able to distribute taxable income in accordance with the percentages laid out in the operating agreement rather than first adding and subtracting a bunch of expense claims with their clearances. Alternatively, this could lead you to outright reimbursement of expense claims by the company so the capital account records are not so cluttered. But those are options. Regardless of how you implement it, the IRS will tax someone for the company’s profits. And sales taxes–the original topic of this thread–reduce profits. So they are, as I said before, handled by the tax forms.

Many thanks for all the contributions on this topic. I know how long it can take to compose concise, meaningful writing. I’m surprised at the discussion my little issue has garnered. Commentary on the nature of LLC’s is basically correct.

This is why I’m asking about Expense claiming, after using Manager for two years:

  1. The basic feature is well implemented, and turns out to be the PRIMARY method of documenting cash outflow. We’re just getting started up on a long slog to profitability. The member partners are supporting the business out of pocket from our day jobs. We all knew what we were in for. We really-eally like horses.
  2. Enter-once-use-many. I hate double handling data. That leads to mistakes. I’d rather not need additional tools outside Manager.
  3. I like my data spiked hard to a concrete slab. Tax codes are set up. There’s a field to select them in expense claims. There are several reports for taxes. But, errr… The tax reports understate make my gross spending. Why is there a report that delivers incorrect sums despite good data entry and tagging? Can I be the first/only one to want to SEE how much sales tax costs? With that data, I might justify a decision to boost spending on web-based suppliers.

Even taking out any personal expenses mixed in, store receipts routinely contain dozens of business items - one $5.00 clevis pin, dozen of separate dietary supplements, bags of feed, bedding, wormers, pitch forks, algecide, etc., etc. All have separate categories, some with supplemental tracking codes. Doing the “X times 1.053” on every line entry before I enter it in Manager is double handling. Double handling makes me sad.

Just FWIW, a little Q&A:

Why not just use a separate bank account? That was Plan A, until I discovered how much banks have started charging for simple business checking accounts. Unless I reach critical mass, I’m not going to sacrifice even more money to the same industry that melted down my portfolio in 2008. Which is why I’m not retired now. Manager’s precision and simplicity takes care of the single-bank-account issue.

How are some things taxable, others not? In the U.S., there are layers of sales tax with a mix of exemptions, for example…

  1. States might charge sales based on principality, others depend on the type of commodity (unpackaged bulk feed vs. bagged retail feed).
  2. Some states charge more tax in some principality (northern virginia 6%, Hampton roads 6%, Rest-of-Va 5.3%).
  3. Feds also relieve taxes from some commodities, such as off-road-diesel intended for tractors.
  4. Taxes might be relieved temporarily inside certain special programs, such as equine rescue and Wounded Warrior support programs.

How does QuickBooks do it? Haven’t used QuickBooks for over a decade. Was considering it for this venture until I discovered Manager, which is awesome enough to shut down the debate.

A few more comments, @ipaqrat:

I would be amazed if a little digging did not turn up a bank offering a small business account that is free. They are not in your region to my knowledge, but USBank has a small business checking account that is free of all fees, with no limits on transactions, so long as you get statements online. By using online checking, I even avoid check printing charges. If none of the majors offer such a product, look to a smaller, regional bank.

I agree. But I don’t see what this has to do with sales tax recording unless you insist on mixing personal and business expenses when you make purchases. In other words, that’s an easy problem to avoid.

All true, but irrelevant. The tax code features are in the program for other countries. They are linked via hard-coding to the taxes payable accounts, whatever a user might have named them. Under US rules, since sales tax can be considered part of the expense, there is no need to break them out. And you are not remitting anything to any tax authority. Keep it simple.

I am fully aware of this, but again, it is irrelevant. All the burden falls on the selling merchant. You don’t need to have separate tax-exempt expense accounts. Whatever you have been charged, including sales tax or not, goes into the recorded expense. Having said that, our wonderfully simple tax code certainly contains some interesting wrinkles, such as various investment credits, that make it convenient to set up your chart of accounts so that some items are isolated. But note that I said convenient. This has nothing to do with profitability of the company. It only makes it easier at tax time to figure out what to report in each category for pass-through to the LLC members. All that could be done completely outside Manager. My recommendation on this is to have a close look at the partnership tax return and conform your chart of accounts to it. Consult with an accountant if necessary. That way, your P&L from Manager will already be divided according to the inputs needed for your return. And the forms (or more probably the software) will take things from there. An obvious example is the 50% deductibility of most meals and entertainment expenses. They get recorded at full cost, including sales, hospitality, liquor, and whatever other taxes your local authorities impose. When they go into the tax form/software, the 50% reduction gets made automatically.

Ah… This is my answer from Manager’s feature-coding feature perspective… “linked via hard-coding to the taxes payable accounts.” I had quite simply hoped it would be a report setting I had overlooked - or that would be a light lift. Translates to “Ehhh, Fuggheadaboudid…” Nuff said.

I am aware of the aforementioned points regarding accounting, LLC’s and tax law. Therefore I have not used the sales tax subsystem for decision support. Nevertheless, I appreciate the insights.

@ipaqrat, maybe I’m misinterpreting something, but you seem a little miffed in your last post. If someone, especially me, wrote anything that you interpreted as dismissive, please reconsider. All the responders to this thread have done a lot to try to help users with questions. Sometimes, the answers get pedantic, because one never knows the question-asker’s level of knowledge or experience. But please be assured, everything has been said from a perspective of sincerely trying to help.

Can you provide a translation on the above - because I can’t interrupt it

Heck, no i’m not miffed! To the contrary, I’m surprised at the involvement, though I shouldn’t be; support was one reason I settled on Manager.

Anyway, to put this to rest, my question was a lot simpler than it must have seemed. And ultimately, the actual answer is simple, too: Feature not conceived for U.S., hard-coded to tax-payables.

So it’s all good. I’m framing up some more requests, too. No deal breakers for me, just things that make data entry more convenient.