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Level 1

What is the correct procedure to record a customer deposit (or prepayment towards an invoice) for a cash based business in order to correctly record sales tax?

We run a cash based photography business, and I am struggling with how to correctly record our customer deposits. Customers pay $200 to book a date that will apply to the balance of their invoice - sometimes these can be in separate years. How do these get recorded so that the sales tax is recorded correctly and their invoices are accurate?

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Best answer 12-10-2018

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Level 8

See if this helps, https://community.intuit.com/articles/...

7 Comments
Level 8

See if this helps, https://community.intuit.com/articles/...

Level 1

Thank you! That does help. When handling it this way, doe...

Thank you! That does help. When handling it this way, does the sales tax get recorded in quickbooks on the date of the deposit/retainer, or does it get recorded on the date of the remaining balance paid? We are cashed based, so want to make sure I am paying sales tax when I should be. Sometimes deposits are paid months, sometimes close to a year, in advance.
Level 8

Check with your accountant, but since the upfront deposit...

Check with your accountant, but since the upfront deposit is recorded as a liability I would expect tax calculations be done when the deposit/credit memo is applied at invoicing.
Level 15

Upfront prepayments are income for a cash basis entity, o...

Upfront prepayments are income for a cash basis entity, one that is not allowed to carry liability.

Prepayments that are taxable when you get them are also taxable when put on a credit memo to apply them (creates a negative sale and reversal of tax). Or, it is Not Taxed when you get it and Not Taxed when you use it to apply to the actual sale.

Putting it on a Sales Receipt = the date of this sale, just like any sale you report for Sales and sales taxes.

Level 1

Re: Thank you! That does help. When handling it this way, doe...

not sure if you are still working on this problem...

the way you set up the pre-payment item determines whether the tax is applied to that item.

Think of it like you are selling your services on a tax-exempt basis for customer deposits. Mark the item as tax exempt (either in the set up of the item or on each line item on the sales receipt/invoice). Double check with the local sales tax authority to make sure that they don't require you to collect sales tax on deposits.

Level 1

Re: Thank you! That does help. When handling it this way, doe...

and the date it gets recorded is the date you use on the transaction.

If you use a sales receipt for the deposit, it occurs on that date. Then if you use an invoice for the delivery of services, that date determines when the tax is payable (assuming the following set up)

 

Dec 10/2018: Sales Receipt for deposit

$500 Tax Exempt, Item = "Customer Deposits" (income account should be a balance sheet account)

 

July 19/2018: Invoice for services rendered:

$2500 + State Tax = 5% Item= "Photo Services"

-500 tax Exempt, Item = Customer Deposits

Balance Owing From Customer: $2,125 (=$2,625 - $500)

Taxes Payable on July 19: 5% x $2,500 = $625

 

I work with other photographers and they sometimes recognize revenue on the first $500 in the year they collect the deposit because they consider it non-refundable. If you were to follow that same policy, then you definitely need to check with the tax authority to see if what I listed here is appropriate because it's probably not.

Level 1

Re: Thank you! That does help. When handling it this way, doe...

According to each state it can vary, but in CA sales tax is only due when the product is delivered. The customer deposit item should not have any sales tax code associated with it at all.  When you invoice the customer for the sales the tax it is calculated on the item being sold and not impacted by the item deduction for the deposit paid when it was ordered.

 

Jeanette R.

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