Damages Deposit - Deductions - Non-taxable Income - Chart of Accounts?

teawrecks · ‎May 31, 2022

Hi everyone,

I'm a sole proprietor which uses their house as photography/filming location. I've had some advice from our accountant previously and am trying to record things as properly as possible in Quickbooks Online and do most of my accounting personally. For hire of our location, we always retain an Overtime/Damages Deposit which is invoiced with hire fee until hire is over, and once we've done a walkaround, credit note is created to refund the deposit with itemised deductions if necessary. There are often charges for stained carpets and other miscellaneous damages which are common in the industry unfortunately--have set up products/services for any itemised deduction accordingly. This has all lined up nicely within our Sales and working fine.

My confusion start however, as our accountant previously said these deductions count as losses, damages, or compensation and are not taxable income. (Also hoping the accountant of course hasn't advised us incorrectly.) Furthermore, I have expense accounts for things specifically like carpet cleaning and do not want to be double counting an expense (carpet cleaning) and non-taxable deduction income (carpets damaged) this relates to:

1. Should the deposit deductions be put into an Equity account? I haven't found a good solution for a non-taxable income item in the Chart of Accounts. If put in Other Income, it folds into my taxable income.

2. Over the course of the year, we spent £250 on carpet cleaning as they must be cleaned periodically, however there is only £170 in deposit deductions related to stained/dirtied carpets. From my layman's knowledge, I assume I should only be expensing £80 (£250 - £170 = £80) to prevent double counting? I'm not sure I've really understood it correctly in the slightest.

Any help would be greatly appreciated, thanks!

paul72 · ‎May 31, 2022

Hi @teawrecks

If it were me, I'd go back to the accountant & ask these questions - just to get everything straight in my head.

I think (& I underline the word because I don't know - just an educated or maybe that should be ill-educated guess!) the fact that it's your own home makes a difference to how you should treat the damages.

In the same way that a buy-to-let owner can claim tax-relief on repairs (but not betterment) I think the accountant is suggesting that any charges levied by you are simply to cover the damage incurred - not to improve - and so there is an equal & opposite loss that these charges offset.

Insurance claims work in the same way. They aren't generally treated as Income because they simply put you back to the same financial position.

(in a way, you could think of the charges as an insurance claim I suppose)

How you enter that into QBO is the key.

If you enter the charges as standard (taxable) income, you need to enter an equal loss/expense. If the cleaning/repairs are contracted out the bill for this would be your expense to offset. Any surplus would be profit (so I don't understand fully the accountant's idea that the income should be non-taxable unless the damage is left unrepaired or is to the fabric of the building).

If you generally do the cleaning/repairs yourself you can see the point that it would be non-taxable.

For point (2), I think the periodic cleaning should be an Expense because it can't be attributed to a specific incident - after all, keeping the place clean is a necessary part of the business.

Hope this helps.

View solution in original post

paul72 · ‎May 31, 2022

Hi @teawrecks

If it were me, I'd go back to the accountant & ask these questions - just to get everything straight in my head.

I think (& I underline the word because I don't know - just an educated or maybe that should be ill-educated guess!) the fact that it's your own home makes a difference to how you should treat the damages.

In the same way that a buy-to-let owner can claim tax-relief on repairs (but not betterment) I think the accountant is suggesting that any charges levied by you are simply to cover the damage incurred - not to improve - and so there is an equal & opposite loss that these charges offset.

Insurance claims work in the same way. They aren't generally treated as Income because they simply put you back to the same financial position.

(in a way, you could think of the charges as an insurance claim I suppose)

How you enter that into QBO is the key.

If you enter the charges as standard (taxable) income, you need to enter an equal loss/expense. If the cleaning/repairs are contracted out the bill for this would be your expense to offset. Any surplus would be profit (so I don't understand fully the accountant's idea that the income should be non-taxable unless the damage is left unrepaired or is to the fabric of the building).

If you generally do the cleaning/repairs yourself you can see the point that it would be non-taxable.

For point (2), I think the periodic cleaning should be an Expense because it can't be attributed to a specific incident - after all, keeping the place clean is a necessary part of the business.

Hope this helps.

teawrecks · ‎May 31, 2022

Thank you, that's really helpful. Starting to understand a bit better. I'm thinking entering the cleaning deductions as standard income with all cleaning counted as expenses is the easiest and most reasonable way as you mention.

If you were to do something similar to an insurance claim for something we can't replace, which account would you use for this? We've had other issues where an antique piece of furniture was broken completely. We deducted from their deposit, but I believe they ended up claiming from their public liability insurance. I imagine we treat this like an insurance claim as you mention?

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Damages Deposit - Deductions - Non-taxable Income - Chart of Accounts?