What account does corporation tax go under?

OK I see where you are coming from and I am not sure if the outlined treatment is correct.
In the (distant) past there use to be the P&L Statement and then the P&L Appropriation Statement which was a year end account where the P&L profit was transfer to and various appropriations were deducted - dividends, corporation tax, allocation to reserves etc - then the remaining profit was transferred to Retained earning. That system really only applied to Public companies or audited private companies but is no longer used that way due to changed accounting standards.

Corporation tax is not an expense, it is a levy on profit as there are no goods or services involved, hence the above appropriation process. In todays world I don’t see any need for small business (sole trader, partnership, owner/director corporations or bigger) needing to worry about making provision for profit tax in their accounts - especially if the accounts are only for your consumption.

When your tax assessment arrives - Spend Money with the line entry “Retained Earning” - because that’s what it is - a charge on Profit. For the sole trader use Equity.

For those with corporations, if you use an accountant to do your tax return they may also provide you a set of Financial Statements, in which they may or may not include a corporate tax allocation. As its only a provision (estimate) its entirely optional if you want to reflect that in your Manager accounts.

Tax department assessments are an off Balance Sheet activity, not an activity of the business.
The purist will probably dispute this approach but modern small business management has moved on from the appropriation days.

As a sole trader in Australia the payment of your personal income tax assessment should be classified as personal drawings under your Capital Account. You can create a specific Capital sub-account under settings if you would like to track your regular drawings separately. Even though you are the owner/sole trader of your business, your personal income tax assessment includes non-business income, deductions and tax offsets that would have no relevance to the business. If you incorporated a company, it would exist as a separate legal entity, its income tax assessment would only relate to its operations and the payment of its income tax would be treated as an expense separately to other expenses so that your profit & loss statement shows net profit before tax and net profit after tax.

Interesting that your explanation differs from @lubos. In one sense, his approach does not make sense to me, because I was always taught that corporation tax is not an expense. An expense is tax deductible - and corporation tax is the Tax therefore cannot be an expense lol.

In May, I will see if I can get my accountant to look at both options and see what they recommend. I would prefer your approach so that I don’t have to use the journal entries as eventually journal entries tab will become optional rather than mandatory and I don’t see the need to have journal entries for one entry a year! Also your explanation makes more sense using the retained earnings account.

So you are saying to actually pay the bill one goes to bank and select spend money and select retained earnings as account, which is essentially what I do with VAT - I go to spend money and select VAT Tax account. The only difference is that Manager calculates the amount of tax owed and I think this is where my confusion was coming in. Lubos was probably talking about allocating the amount and then paying the amount - two separate steps. I didn’t realise that you could simply just pay the corporation tax to Retained Earnings and that was it. I don’t need to “calculate” the Corporation Tax as my accountant will be doing that.

Would you be able to point me to where the new versus old rules are discussed as I was also taught to appropriate the corporation tax in the dim past! Thanks for the explanation.

Well, there are also non-deductible expenses. Income tax expense (or corporation tax) is non-deductible but it is still an expense. In other words, your profit for accounting purposes might be different from the profit for taxation purposes. And usually is.

This is why in Manager, you can set-up your profit & loss statement sections so you can have a sub-total called Net profit before income tax, then have income tax expense account and then final total called Net profit after income tax.

All public-listed companies do it this way because that’s what accounting standards say. Why? Because shareholders care about earnings per share and earnings per share is net profit after all expenses including tax expense (divided by number of shares).

However, you don’t have to do it this way. You are not a reporting entity and therefore you have liberty to choose how you prefer to do it.

I will always recommend what I consider the proper way but everybody is free to take shortcuts.

Anyway, as @Tut and @tony say, it’s not always the proper way to have income tax expense in your P&L but since you are talking about corporation tax, I assume in your case it would be the proper way. That doesn’t mean you can’t take shortcuts and do as @Brucanna suggests.

I think its just me being a purist. To me the term expense means an operating expense. I always think of corporation tax as a liability not an expense.

I will discuss the matter with my accountants as there are clearly pros and cons to both methods. Just paying the corporation tax and allocating to retained earnings is simplest, but does have the disadvantage in that its mirroring the profit and loss statement and balance sheets that are submitted to the UK tax people. I like your point about having corporation tax showing on the profit and loss statement. So clearly both methods have pros and cons.

This isn’t a old rule v’s new rule situation, its just that accounting standards evolved over time, mainly to stop corporations manipulating their financial results. Technically, appropriation is still the correct process, its just that accounting packages don’t make provision for them. If Manager did as @tony states “your profit & loss statement shows net profit before tax and net profit after tax” then the issue has clarity. If the P&L had this presentation then what “@lubos was talking about, allocating the amount and then paying the amount - two separate steps” would work perfectly (but requiring that dreaded journal entry). Until then, Retained Earning is preferable over Expense account.

I guess you could draft your Manager chart of accounts to represent that except you can’t manipulate the bottom “Net Profit” title. In fact I would prefer net profit before tax/dividends and net profit after tax/dividends so you can cater for dividends also. Noting that this process only applies to corporations so some sort of corporation preference setting would be required.

As for corporation tax, if you have straight forward business transactions your accounting profit may equal your tax return profit but quite often these two profits don’t match. Let say you had a 10,000 accounting profit and that included a provision for untaken annual leave of 1,000. This is a paper transaction which tax departments generally don’t accept as deductable so it gets added back, now your tax profit is 11,000. Governments may have a R&D incentive of 150% deduction, so if you expensed 12,000 this gives you a tax deduction of 18,000 so now your tax profit is 5,000.

These types of items, generally known as “Timing Differences”, are the reason that tax assessments are an off Balance Sheet activity, as they never get reflected in the accounting profit

PS: Because I drafted this over a period of time (interruptions) I hadn’t noted @lubos and @dalacor latest posts, sorry for any duplications

@lubos how can you set up your final total to be called Net Profit after Tax.?
The current P&L report total “Net Profit” is not a chart of account which can be edited.
Does “Net Profit” change to “Net Loss” automatically if applicable
So I am assuming that any report would show at the bottom.

Net profit after Tax (created chart of account)
Net Profit (report default title)

@Brucanna, @lubos,

I have done the following:

Created a New Group with Settings/Chart of Accounts

I created An Account under this Group

This is my P_L

This works for me

You can. All you have to do is to add one more total which should be the last item in your Chart of Accounts on P&L side. That total will then replace the in-built one Net profit (loss).

Can I just say that this topic justifies why forums exist, you may need to shake a few brains but collectively results can be achieved - as this topic proves

Can I suggest that the Chart of Accounts section of the Guides include a sub-topic “recording corporation tax” which would illustrate the above, because putting corporation tax above the line mixed in with normal expenses is so clearly wrong.

Now for another unorthodox solution, @dalacor if journals cause you such angst, nightmares and cold sweats then there is an alternative. Tax assessments (as they don’t relate to goods and services) is a de facto name for Invoice - demand for payment. So you could take up a pro forma invoice with the supplier being “Treasury” or any other name which you refer to them by. Ok, this doesn’t highlight the provision under liabilities but for a non-reporting entity - who cares.

Wow I am drowning in options here. I will discuss it with my accountant. I think the main requirement for me is to be able to see what I pay in coporation tax over the years as a basis for comparison. I am not really worried about using the journal, its more its seems silly to use the journal for one thing once a year, when I can do it the same way that I do everything else in Manager.

@lubos and @Brucanna, after my meeting with my accountant, the route that we have gone down is we created a corporation Tax Expense Account and a Corporation Tax Payable Liability Account. We did a journal entry and debited the expense account and credited the liability account. This is basically what Lubos suggested right from the beginning and I now realise that this is the best method for me.

What I have just done right now is I have removed Corporation Tax from my main expenses, by creating a new category called company taxes and I have made that less expenses and I stuck the corporation tax in there. I have also managed to create the subtotal Net Profit Before Tax.

I like this approach because most accountants will understand exactly what I have done as this is shall we say the traditionally correct way to provision corporation tax and the added advantage is that its much easier to see pre tax and post tax profits per year etc.

See here in the pic. If I have understood the two of you, this is shall we say the optimal setup. I am glad that I got this one worked out! Let me know if I got anything wrong! The only thing that I cannot change is the net profit on the bottom to say net profit after tax!

Very interesting thread!

I am in the same position as Dalacor whereby I do not use the Journal Entry in Manager but I must record the annual corporate tax for 2019 and pay it in 2020. Therefore, I have decided to follow suit, but my question is, will using the Journal Entry for this one amount affect anything else? Or in other words why can’t one use the ‘receipts and payment’ tab fot this, like everything else?

  1. Annual Corporate Tax (Expenses).
  2. Annual Corporate Tax Payable (Liabilities).

Because charging Corporation Tax to the P & L is not a payment nor receipt

It’s more like a purchase invoice

OK, thanks.

I am still a little unsure how to complete the payment procedure as the money is sitting in the main account?

I assume there are two procedures, 1. To record the amount and 2. to pay the amount.
The journal entry is recording the amount, ie. Credit Annual Corporate Tax expense account, debit Annual Corporate Tax liabilities account.

How would one make the actual payment out of the Annual Corporate Tax liabilities account?

You don’t pay out of the liability account. You use a payment transaction to pay from a bank account, posting the payment to the liability account.

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I see no reason not to use a receipt / payment. Doing so involves using a multiple line receipt/payment to accomplish all account adjustments at the same time when you pay your tax (money goes out of your bank to the tax office)

Think of it like this. You have a two step process.

Firstly you allocate the amount of Corporation Tax
Then at a later date, you pay the Corporation Tax

So have two separate transactions.

The first transaction where you allocate the Corporation Tax, you do a Journal Entry to debit the Corporation Tax Expense Account - as you are adding an expense to the corporation on the Profit and Loss Sheet. (Never mind the fact that it is not technically an expense). And the counter side is that you credit the Corporation Tax Payable Liability Account on the B/S in that Journal Entry.

This allocates the Corporation Tax as an expense. It has to be a journal entry because you are not paying or receiving any money at this stage. So you cannot use the bank transactions here because no money is transferred.

What I did (as you can see in my picture) is that I separated my expenses from my Corporation Tax so that my Corporation Tax (and now my Dividends) shows on the Profit and Loss Statement for each year after Income and Expenses is recorded. It is worthwhile doing this for Dividends as well - using different accounts obviously.

The purpose of allocating the Corporation Tax (and Dividends) in the way that I have done is that I can see every year on my Profit and Loss how much Corporation Tax I am paying and how much in Dividends I am receiving. You cannot do this if you only have a liability account on the B/S (such as Retained Earnings) as the B/S does not show annual figures.

So I now allocate both the Corporation Tax and Dividends via Journal entry to a Liability account on the BS and an expense account on the P&L to make it easy to see the figures annually.

When paying the Dividends or Corporations, you simply do a normal bank spend and select the Corporation Tax or Dividends Liability account on the BS. This effectively resets that liability account to nil each year as the payment balances out the allocation.

You don’t have to do it this way. The key point you need to decide is what you want to achieve when recording the Dividends and CT. I find it easier to record these on the P&L so that I create annual P&L reports each year and at a glance see these amounts.

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This is incorrect. The allocation of Corporation Tax will occur at the end of your tax year. Payment of the Corporation Tax usually takes place nine months later! So it will always be a Journal entry for the allocation and bank payment at a later date for Corporation Tax. Unless one pays the CT immediately which is very unlikely.

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That depends on jurisdiction.