Taxable Discounts in Invoices

[hanky]

What's the difference between taxable discounts and non-taxable discounts in an invoice?

[Rustler]

If the discount is taxable, then the sales price is lowered by the discount amount, and then sales tax is computed

non taxable discount, the sales tax is computed on the retail taxable sales amount

whether the discount is taxable or not is up to your state sales tax department

[IamjuViel]

Good day, @hanky.

@Rustler is correct! Allow me to share additional information on how QuickBooks handles Discounts in invoices. 

In order to apply discount in your invoices, you need to create discount item and add it as line item on the invoice. Here's how to create a discount item:

1. Go to List.
2. Choose Item List.
3. Click the Item drop-down arrow at the bottom of the Item List window.
4. Select New.
5. Click the Type drop-down, choose Discount.   
6. Enter the Description and the Amount or % of the discount.
7. Choose which account in the Chart of Accounts will the discount be mapped.
8. Select the Tax Code of the Discount.
   • Taxable
   • Non-Taxable
9. Click Ok. 

For additional insights, you may check out this article: Add, edit, and delete items.

That should do it! Don't hesitate to visit us here in the Community if you have other questions about applying discounts in QuickBooks Desktop. I'm always here to help.

[DMCar]

I have discovered an issue with using a discount on an invoice in Quickbooks Premier and possibly other versions of QuickBooks.  A non taxable discount will calculate tax based on the first line item of the invoice regardless if the first item is a taxable item or a non-taxable service.  Be advised that you must not add non-taxable items first on the invoice if you want the discount to apply to the taxable items before the tax is calculated, otherwise you will be charging more tax than expected. 

(Example:  If you have a "non-taxable item" such as a $20 service fee and then have taxable sales items totaling $100 at 5%, with a $20 discount before taxes, the sales tax should be $4 for the $80 in taxable items.  However, if the "non-taxable item" or service is listed first on the invoice the discount will apply to it first, and does not reduce the tax due for the taxable items - therefore showing a sales tax due of $5.) 

The solution is to list the taxable items first on the invoice if the discount applies to taxable items.  Then the tax will calculate correctly.

[Emily M]

Thanks for joining the thread, @DMCar.

You’ve on the right track with apply discounts to a taxable item. You’ll need to use a discount line item if you need to apply a discount to one or more items. You need to create a discount item first before apply it on the invoice.

Here’s how:

1. Click the Lists menu and select Item List from the drop-down menu in QuickBooks.
2. Choose the Item button and New at the bottom of the Item List.
3. Select Type and Discount.
4. Type a name to identify the discount.
5. Provide a description of the discount. The description shows up on the sales form after applying it to the invoice.
6. Type a percentage or fixed dollar amount for the discount in the Amount of % field. Type a percentage with the % field after the number. You may leave these fields blank and apply the percent or fixed discount amount directly into the invoice later.
7. Pick the Account drop-down arrow and select the appropriate income account for the applied discount.
8. Find the Tax-Code drop-down arrow and apply the appropriate tax code, if relevant to your service or product. Some states don't require taxes on certain products or services, so check with your accountant.
9. Push OK.

Let me know if you have any other questions.

[DMCar]

Hi Emily,

Thanks for the response.  I should mention that in my case I do have a discount line item that I am referring to. 

I have an update to the issue.  As I reported, the "discount line item" for taxable items does not apply correctly to the invoice when there are non-taxable items on the invoice unless it is entered in a certain order.  To obtain the proper tax amount, the "discount line item" must be entered on the invoice BEFORE any non-taxable items are entered.  I have found that entering a non-taxable item anywhere before the discount line item will not apply the discount correctly and you will end up paying more tax.  Non-taxable items like service fees must be entered last on the invoice, after the discount line item.

[RSanger]

the problem runs deeper... I found that my discount was miscalculated with a non-taxable service charge listed above it

item 1 TAX

shipping NON

item 2 TAX

discount TAX

with value of discount = value of item 2  left an incorrect tax amount.

If I re-arranged the items on the list, with Shipping on the LAST LINE, then tax was computed correctly.

[Mike K1]

I can tell you that it does not appear that sales tax is being computed correctly when discounting an invoice in quick books online. The software is not discounting the line items proportionately then applying sales tax to each one. For example if I have 2 line items each one is $100 (making the total invoice worth $200) then I select a 20% discount. The sales tax is $4.95 on an 8.25% tax rate. The sales tax should be 80% of $8.25, which is $6.60. In this case QBO is deducting the entire discounted amount from the taxable line item then sales tax is being computed. In other words, the $200 invoice is being reduced by 20% resulting in a $160 invoice. However the $40 that is removed is being pulled only from the taxable line item which is where the number $4.95 is coming from above. Computing the sales tax on $60 at 8.25% results in $4.95. END OF REMARK. Another experiment that I have not had time to figure out happens when you remove the check box for taxable items on every line then discount the invoice. This will result in a negative sales tax amount and will actually increase the invoice amount. In other words if I make all line items non taxable then I discount the invoice and select my special tax rate that I have created the applied tax rate will appear as a negative number. I am not infallible but I do have an advanced degree in mathematics and I have carefully set up sales tax with my accountant. The sales tax rate reads correctly on my invoices it says "8.25%" and the taxable amount is correct also, but despite these things looking correct QBO is not applying the displayed sales tax rate against the displayed taxable amount and I feel like it is a huge problem. People say things to me like "well you should be verifying these amounts" and I do not believe that should be part of our daily process when using a software. Yes it should be checked occasionally but software is to be trusted especially when dealing with basic mathematics. If QBO can not compute sales tax correctly when a user has competently entered the custom sales tax rate then what good is the product.