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cdcompany2
Level 1

Tax Payments made after Closing Books

How do you classify income tax payments made in the following tax year, after an account has been "closed out" for year end and "moved" into Retained Earnings? For example, in Jan 2021 I paid the estimated tax for Q4 2020, and a few weeks later I paid more 2020 taxes when we filed because I had slightly underestimated. On my balance sheet, my Estimated Taxes line (equity account) is inflated because it includes these 2020 amounts as well. Does this matter, or is there a "best practice" I should be following? 

4 Comments 4
ShiellaGraceA
QuickBooks Team

Tax Payments made after Closing Books

Thanks for reaching out to us here, @cdcompany2.

 

I have some information about reclassifying your income tax payments. You'll want to create a journal entry to correct the reporting of your accounts. Since the adjustment is for closed books, I recommend consulting with your accountant first before correcting. They are your best resources in dealing with your tax accounts.

 

To create a journal entry,

 

  1. Go to +New.
  2. Select Journal entry.
  3. Choose the corresponding accounts.
  4. Enter the amounts to Debits and Credits.
  5. Click Save and close.

 

For details about the closed books, check out this guide: Close your books in QuickBooks Online.

 

I'm also attaching this link here if you need help with other tasks in QBO. It has our general topics with articles.

 

Keep me posted if you have follow-up questions or concerns with your accounts. I'll be here for you. Have a nice day ahead.

john-pero
Community Champion

Tax Payments made after Closing Books

Let me ask you this, first, are you a C-type corporation? You would have to be since that is the ONLY type of entity that incurs business income tax.  If you are not but are instead an S-corp, LLC, or Sole Proprietor your income tax estimates and payments are ALL personal in nature and have absolutely nothing to do with your business' books, other than as Owner Draw if you use business funds to make these payments.

 

As a C corporation your profits are taxed twice, once at corporate level and again on each shareholder's personal return for any dividend payouts. Normally a C corp would likely report as Accrual and the tax due would be as of last day of fiscal year and when you pay has no connection to the recording of teh expense under accrual rules (even your estimated quarterly corporate taxes are a current asset until actual tax is calculated)

 

If you close your books as of 12/31 and later in January come up with your corporate tax owed you have to go back, open the bools, and enter the tax, as of 12/31, apply any prepayments, and then re-close the books. Your January payments are simply payments against the open liability

 

If any other entity type, the tax estimates and payments REDUCE, not increase, your equity. The retained earnings, close out to increase your equity whether you leave the money or take it out. the paper profit passes through to the personal return and only C-corps can actually retain earnings

cdcompany2
Level 1

Tax Payments made after Closing Books

John-Pero - thank you for the detailed response. I apologize, I should have more clear in my post - yes we are an LLC taxed as an S-corp, so the tax payments are personal but being paid from the business account. Our QBO is setup with an owner's equity draw account for tax payments. We have similar equity accounts for retirement contributions, HSA deposits, etc - and in every year so far we've ended up with draws in the year following the tax year that it applies to. I guess to better phrase my question - in these situations, is it correct to leave as is, with the balance sheet reflecting ALL the draws from a fiscal year in those accounts, even though some of the draws were for taxes/contributions/etc assigned to the prior tax year? Or, should we be using journal entries (or something else) to reassign the delayed transactions to the correct tax year, so that when we pull the YE report those accounts are reflective of what was paid in that tax year. 

 

I can see both sides - on one hand it shouldn't matter what the tax year is because those equity accounts are literally just reflecting the amount of money that we pulled from the business in a given year. On the other hand, it's very confusing when it comes to tax time when our CPA pulls our balance sheet and we have to provide a specific break down of "no, that was for last year, this was for this year." etc. So, I am wondering if there is a way to make this cleaner, and keep all tax-related expenses in the same calendar year, even if paid afterwards. I hope that makes more sense! Appreciate your input!  

cdcompany2
Level 1

Tax Payments made after Closing Books

 

John-Pero - thank you for the detailed response. I apologize, I should have more clear in my post - yes we are an LLC taxed as an S-corp, so the tax payments are personal but being paid from the business account. Our QBO is setup with an owner's equity draw account for tax payments. We have similar equity accounts for retirement contributions, HSA deposits, etc - and in every year so far we've ended up with draws in the year following the tax year that it applies to. I guess to better phrase my question - in these situations, is it correct to leave as is, with the balance sheet reflecting ALL the draws from a fiscal year in those accounts, even though some of the draws were for taxes/contributions/etc assigned to the prior tax year? Or, should we be using journal entries (or something else) to reassign the delayed transactions to the correct tax year, so that when we pull the YE report those accounts are reflective of what was paid in that tax year. 

 

I can see both sides - on one hand it shouldn't matter what the tax year is because those equity accounts are literally just reflecting the amount of money that we pulled from the business in a given year. On the other hand, it's very confusing when it comes to tax time when our CPA pulls our balance sheet and we have to provide a specific break down of "no, that was for last year, this was for this year." etc. So, I am wondering if there is a way to make this cleaner, and keep all tax-related expenses in the same calendar year, even if paid afterwards. I hope that makes more sense! Appreciate your input!  

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