Does anyone have any ideas on how to deal with an unexpected credit on a tax liability? I have a Liability account for a local tax on sales. I went to pay the tax due, and in filing the payment, the taxing authority gave me a credit for filing within a specified period, effectively reducing my liability. Now the payment for the reduced amount due has cleared the bank, the taxing authority shows a zero balance due, but Manager still shows a liability due for the same amount as the tax credit.
How do I reduce that liability account by the amount of the tax credit?
You have left out something that you did. If you recorded a payment equal to what you thought your tax liability was, your balance in Manager in your tax liability account would be zero. But if the tax authority extended you a credit, you needed to record that in some way, or it would not be reflected in Manager at all. How did you do that?
A credit from the tax authority is actually a debit in your accounts. The easiest way to enter that in Manager is a receipt, posted to the tax liability account. Although they may not have sent you actual money, they have recorded your overpayment, effectively paying into your tax account at the authority instead of into your bank account. That will have the effect of moving the tax liability account balance in a negative direction, because the tax authority now owes you money. As you continue to assess tax to your customers, the balance of your tax liability account will show that you owe less to the authority.
That is something you need to clarify with the tax authority. Perhaps their portal only shows what you owe (if anything), rather than the true balance of your account with them.
For the first time, I have had sales applicable to an adjacent geographic area with a separate tax authority from the one in which my business is based. I have to file and pay taxes electronically over the internet. Prior to engaging with the tax authority in any way, I calculated tax due based on sales in each transaction. When I went to file and pay my taxes, I entered the total sales into the tax authority’s website, and they calculated the tax due. This matched my calculation of tax due exactly. Then I went to pay the taxes electronically (from my business bank account) through the tax authority’s website. When I did this, the tax authority automatically applied something called “Vendor Compensation” - a credit against the taxes due (that I agreed with). They took my payment for the tax due LESS the amount of that tax credit. So as far as Manager is concerned, I didn’t pay enough, even though the tax authority says I did. I’m looking for ways to tell Manager about that tax credit (without declaring additional income).
I think you understand my problem. I have verified the situation with the tax authority. They consider the liability to be fully paid. My question is how do I record that credit in Manager so the tax liability account in manager reflects the credit?
You need to use a journal entry to debit the Tax Liability Account and credit a Miscellaneous Income account. If it isn’t a significant amount, I suppose you could always credit a sales income account
That is exactly what I explained. However, since you are dealing with a different tax authority, you probably need a separate tax liability account from the one you normally use.
No doubt they do. But, according to your first post, you paid them more than they believe you owed them. Therefore, they owe you money. That debit balance can remain in a tax liability account in Manager against the possibility of a future transaction in that jurisdiction, where it would offset other amounts you would owe them. But that does nothing to address your recovery of money owed to you as a result of your overpayment.
@Joe91 is correct, however. If you charged your customers more than they technically owed because of the tax credit from the adjacent tax jurisdiction (you overcharged them for tax), that can only be taken up as additional income. In other words, you charged them for the actual tax assessed after the reduction from the tax authority’s credit, plus the remaining amount of the sales transaction. So you sold whatever the goods or services were for more than you thought.
It was not clear to me from the initial post that the bank payment was reduced. I interpreted @mcperreault’s initial statement to mean the bank payment covered the reduced amount (leaving an overpayment). That is what I addressed in post #3. @mcperreault’s post #4 did not alter my understanding of the situation, even though it said the tax authority took payment “for the tax due LESS the amount of that tax credit.”
I find it very strange that a tax authority is apparently controlling a bank payment. Maybe that interfered with my understanding of the situation. And @mcperreault’s comment that I understood the problem apparently reinforced my impressions.
@mcperreault, if the situation is as @Joe91 described, then things could be more complex. That description sounds like an implementation of a flat rate VAT scheme. Under such a scheme, the end customer owes, and the business should collect, the full amount stipulated by a tax code. But the tax authority requires submittal of a lesser amount, based on the assumption that the business had offsetting VAT paid on purchases. This notion is corroborated by your report that the tax authority called the credit Vendor compensation. You can read more about implementation of flat rate tax schemes in Manager near the end of this Guide: https://www.manager.io/guides/8901. Note that you will need to define and apply a new custom tax code, going back to edit the sales transactions involved. But a flat rate tax code in Manager does away with the need for journal entries by automatically applying the difference between collections and remittances to the income account where the sale was recorded.
As a novice to Manager and book-keeping in general, any misunderstandings on your part is clearly my fault for not explaining suffiiciently. I very much appreciate you and Joe91 trying to help me out here.
By way of further explanation - the tax authority is not “controlling” the bank payment. This particular situation is that the tax under discussion is a US state sales tax. My business is in one US state, and the tax authority in question is a neighboring state. This tax payment is made through what is referred to as the “Automated Clearing House” or ACH. For each transaction, I basically enter into an agreement with the taxing authority to give them permission to draft against my business bank account directly and electronically. At large scale, this reduces their processing and administrative overhead costs greatly. The issue here is that they will not draft for more than what they think I owe, based on the information they have. This tax credit scheme is highly complex as it changes depending on the amount of sales reported. There is no way that I see where I could anticipate the amount of the tax credit ahead of time and only charge my customers accordingly.
That being said, I think I understand the situation now, thanks to you and Joe. The tax was really paid by my customers (only collected and remitted by my business). I have no way to anticipate the value of the tax credit to charge my customers at the time of transaction to incorporate the affects of the tax credit. And finally, I have no way to rebate the tax credit to my customers after the fact. The only possible answer at this point is that I treat that tax credit as income, and credit it to the tax liability account, which will make things balance. Does that sound about right?
For the benefit of other forum readers, your lengthy explanation illustrates the importance of completely describing a situation when starting a forum topic.
Based on this more thorough explanation, you can ignore much of what I wrote previously. Your neighboring state’s tax authority has effectively given you a rebate on the sales tax remittance due because you have paid timely and through ACH, saving them the administrative burden and risk of waiting for and processing a check that might not be honored. This is not a flat rate tax scheme, as those exist only under VAT regimes.
So, you were correct to charge your customers the full amount of the tax due. You owe them nothing. For administrative convenience, you should set up a separate tax liability account for the neighboring state. If you did not do that already, you can do it now, edit the custom tax code for the neighboring state’s tax code to post to that account, and all past transactions using that tax code will automatically be reallocated. This has no real financial impact, but will make it easier to see what you owe to each state.
Post the ACH payment of the sales tax remittance to the tax liability account for the appropriate state. Use a journal entry to debit the tax liability account for the rebate and credit an income account. (Remember I originally told you the rebate was a debit in your accounts?) You should consult a local accountant to determine the best income account for posting of the credit leg of such a journal entry. I recommend someone local because they should be familiar with your neighboring state’s rebate policy. (That is not a universal practice.) The same sales account where you credited the original sales could be appropriate (although if that was Inventory - sales, you will not be able to do that in Manager because that is a hard-coded account.) Miscellaneous income might be appropriate. Or, you might want to create a dedicated account, especially if this will be a common occurrence. There could also be aspects of your state’s tax code that govern how such tax rebates from other states are treated. But, from a national perspective, the tax you collected is not income of your business. And the tax you remitted is not an expense. You were merely acting as an agent of the neighboring state, collecting and remitting the tax the end user owed to them for a purchase.
To summarize, it sounds like you are on the right track.
This is what I did, and Manager now reflects the situation. For what its worth, I explained this to my accountant and she agreed that it was the proper thing to do here, as long as I made sure that the Miscellaneous income account is clearly labeled and dedicated to this particular function. I emailed her the Manager back-up file showing this and she is going to look at it next week. I can’t thank you and Tut enough. This is my first go at one of these forums, and quite frankly, I had low expectations. I certainly didn’t expect to find a couple of knowledgeable individuals who would actually solve my problem in short order. Thanks again.
My final comment is that, if your accountant wants the income account reserved for only such tax rebates, you ought to name it that way instead of miscellaneous income.
