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Quicken for Business Setup: Tracking Taxes

JoelC

As I continue my journey in setting up Quicken Business, I was thinking about the treatment / tracking of income taxes.

As my company earns funds each month the laws in Canada are that I need to submit a prescribed amount to CRA (i.e., the Canadian equivalent of the IRS). The amount submitted each month is generally less than the amount actually owed meaning there is a balanced owing at the end of the year.

I was thinking of tracking the taxes in a manner similar to a credit card; namely i) create a Cash Account or Credit Card account for the tax liability ii) each month enter the estimated taxes in that account (i.e., similar to a credit card charge) iii) each month enter the interim taxes remitted (i.e., similar to a credit card payment ) and iv) true up at when the taxes are filed and the final amount owing / refunded is determined by CRA.

I would appreciate best practices / comments / insights in respect of:

The above proposed method for tracking business taxes; and
The approaches / best pratices followed by others in similar situations.

Thanks in advance.

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Comments

mshiggins

Here's a FAQ describing a method to handle U.S. "estimated taxes" (required quarterly tax payments for certain individuals) in Quicken: perhaps you can find something useful in the FAQ.

https://community.quicken.com/discussion/7083374/faq-how-do-i-handle-estimated-taxes

-JP

JoelC

@mshiggins , appreciate the link, it is along the line of what I was thinking.

I will continue to think through my approach and post it here for improvement / review with the hope that it is helpful to some.

Thank you.

JoelC

I propose to the handle taxes as described below:

Step i) I need / want to keep track of two amounts; namely, a) the monthly / quarterly instalments as determined by CRA (i.e., the Canadian Equivalent of the IRS) (“Instalment”) and b) the estimated taxes for the year (which I determine / estimate on a monthly bases based on the monthly P/L) (“Estimated”)

Step ii) I will create an account called Taxes of the credit card type to track the taxes. I will – at the end of each month – a) transfer the Instalment amount from my Checking account to the Taxes account as a payment to the Taxes account and b) enter the Estimated amount in the Taxes account as a charge to the Taxes account.

The transfer of the Instalment amount from my Checking account to the Taxes account will allow the Checking account to reconcile to the bank statement. The transfer will be categorized as Business Expenses:Taxes:Instalment with the Tag FY202X.

The entry of the Estimated amount in the Taxes account will result in the Taxes account estimating / showing the estimated taxes owing as at the end of each month throughout the FY202X year. The transfer will be categorized as Business Expenses:Taxes:Estimated with the Tag FY202X.

If I use cash-based accounting then – because the entry / tracking will be in a credit card type account -- a) will allocate the estimated taxes to the proper month(s) / reporting period(s) and b) will therefore produce accurate P/Ls and other reports for the monthly / reporting period(s) based on the estimated taxes for the year (i.e., rather than the instalment based taxes for the year).

If I use accrual-based accounting the results will be the same.

Step iii) There will be a need to adjust / true up the actual taxes owing (based on the CRA assessment) and the estimated taxes.

When the assessment is received, I would true up by a) transferring the amount / balance from the Taxes account to the Checking account and b) enter the True Up amount (i.e., assessment amount from CRA – amount transferred from the Taxes account) in the Checking account on the same date (assumed to be the date of payment).

The transfer of the amount from the Taxes account to the Checking account will zero out the Checking Taxes account. The transfer will be categorized as Business Expenses:Taxes:Estimated with the Tag FY202X.

The entry of the True Up amount in the Checking account will result in the “two transactions” totalling the assessed amount. The transfer will be categorized as Business Expenses:Taxes:TrueUp with the Tag FY202X.

I would then backdate the “two transactions” to the final day of the FY so that it is recorded / reported in the correct FY. This is unfortunately necessary as I see no other way for Quicken to otherwise report this in FY202X. Is there another way?

I would pay the final assessment from the Checking Account.

***

CONCERNS: The only concern / problem I see with this approach is with respect to the backdating of the “two transactions”. The advantage of backdating is that the proper tax amount is reported for the FY. The disadvantage of backdating is that the cash flow does not match the bank statement in the last month of the fiscal year and the month in which the True Up payment is made. I wonder which approach is better!

***

I am interested in a) people comments / suggestions / thoughts of this approach as well as b) whether it is better to backdate / not backdate the “two transactions”!

Thank you.

mshiggins

"The only concern / problem I see with this approach is with respect to the backdating of the 'two transactions'."

I suggest you take another look at the FAQ shown in my earlier post in this discussion; paying particular attention to the text starting with: "Then you need an adjustment transaction".

I believe the concept described there will allow you to achieve the results you want without having to backdate.

-JP

JoelC

https://community.quicken.com/discussion/comment/20402981#Comment_20402981

@mshiggins , I thank you for your response.

I read your post and have reviewed the above referenced link again and will check / test whether it works and revert back (i.e., I need to move form the conceptual to the actual). That said, three interesting points about the linked approach:

i) As two different categories will be used to record the taxes paid in a calendar year (i.e., [Estimated Taxes] for the quarterly instalments transferred from the cash account to the Estimated Taxes account and Taxes for the year end true up payment that is made in the subsequent year) it is likely / probably a good idea to include a tag such as Taxes 202X to easily report / summarize the taxes made in the fiscal year (i.e., as the taxes paid for a year will appear partially as an expense and partially as a trasnfer based on the two categories). Comments / thoughts?

ii) As the year end true up payment is made in the subsequent year from / out of the cash account, what category and tag would you assign to it so as to minimize its reporting impact (i.e., it should not form part of the P/L in the year that it is paid because it has been included in the P/L in the previous year per i) above, it should appear in the cash account in the year paid so that it balances / reconciles to the bank statements). I do not think that you would categorize it as Taxes or tag it Taxes 202X because this would result in a double counting it per i) above!

If there is an answer to this then I think we have a very good idea here!

Comments / thoughts?

iii) A possible enhancement to the link's suggested approach is that because the [Estimated Taxes] account is never reconciled / used one could enter a "balancing transaction" to bring the [Estimated Taxes] account to nil. Comments / thoughts?

And, with respect to the approach / method I proposed described above, any concerns / improvements other than the true up transaction which is discussed above?

Much thanks.

JoelC

@mshiggins , hmmmm, a little more thinking on my part.

I am thinking that ii) above and further note:

a) RE 202X: It would not get included in 202X reporting because it would be outside of the reporting date range / period (i.e., it would be in the following / next year), so no double counting in 202X, so 202X is fine;

b) RE 202X +1: It would be fine to categorize it as Taxes and / or tag it as Taxes 202X because it accurately would identify it for what it is though it would distort the P/L because it is attributable to the 202X year, not the 202X+1 year. How does one avoid / fix this problem?

Thank you!

JoelC

@mshiggins , hmmm, a little more thinking on my part.

I am thinking to one solution to b) above would be as follows:

a) Create the categories Tax True Up Current Year and Tax True Up Previous Year

b) Enter the actual amount of tax paid twice as follows:

— As at December 31, 202X, categorized as Tax True Up Current Year (with an equal and opposite offset as per the link you provided)

— As at the date paid in 202X+1, categorized as Tax True Up Previous Year

c) Bank Account: This will reconcile because the 202X entry is nil and the 202X+1 is the actual amount

Cash Flow Report: This will be accurate as the actual cash flow is being recorded properly (this follows from Bank Account above)

P/L: This will be accurate by including the category Tax True Up Current Year and excluding Tax True Up Previous Year

Comments / thoughts?

Thank you.

q_lurker

I use a system similar to that written up by JP and posted by @mshiggins inspired by the same source. The system I use is convoluted enough that I do not generally recommend it. I use it simply because I want the tax liability for a given year to be in the same year as the related income and expenses.

For my system, I have a [Prepaid Fed] asset account - essentially an escrow account. I also have a state version. (I also used at one time a [Prepaid Fed WH] account but do not need that anymore. I also have a [Tax Liability] account. Through the course of the year, estimated payments are paid (transferred) to the prepaid escrow accounts. On or about April 15, I enter the state and federal taxes that I owe (dated 12/31/xx ) into the liability account. Those are 'expenses' using the Taxes:Federal or Taxes:State categories. I then pay that liability account down with transfers from the prepaid escrow asset accounts and/or a checking account (if I owe additional tax). The most convoluted part is the 4/15/xx recording — I seem to have to check what I previously did to get it most intuitively clear with entries in the multiple accounts.

Not sure if any of that might translate to what you are trying to accomplish.

JoelC

I use a system similar to that written up by JP and posted by @mshiggins
inspired by the same source. The system I use is convoluted enough that I do not generally recommend it. I use it simply because I want the tax liability for a given year to be in the same year as the related income and expenses.

@q_lurker , I am in complete agreement which is why I wrote up the approach that I did!

The most convoluted part is the 4/15/xx recording — I seem to have to check what I previously did to get it most intuitively clear with entries in the multiple accounts.

@q_lurker, I am again in complete agreement. I believe that the approach that I outlined addresses that problem in every way (i.e., bank account reconciliations work, cash flow reports work, P/L's work, taxes liability is in the same year as the related expenses / income, etc.). Happy to dig in further should you wish.

Thank you!

q_lurker

No need to dig further on my account, unless you choose to. I have tried to keep categories as obvious as possible and simply added three accounts to what most people probably use. Maybe your True-up categories are needed for some reports to come out right. I haven't used anything comparable. Once I have gotten the 4/15/xx transactions recorded, my 'net worth' reports within those months would show I had tax liabilities of $X and tax payments of $Y escrowed. After 4/15, tax liabilities are on the books as $0 (an inaccuracy), and the escrow prepaid accounts start building back up. I suppose I could build up the tax liability account on a monthly basis with some form of estimate, but it would not be valuable to me to guess at that information.

Not critiquing your proposed system, just offering you a look at what I try to do.

JoelC

@q_lurker appreciated and noted.

I will be implementing the method described above in 2024.

I can / will provide an update on i) any tweaks and ii) how it works should someone be intersected.

mshiggins

I'm thinking you're approach is more complicated than I feel competent to comment on. So I'll just try to clarify my understanding of what is suggested in the FAQ as it applies to your situation.

During the tax year, "estimated" tax payments are made; those payments are "categorized" as transfers to an "Estimated taxes" account (a tax holding account, if you will). Meaning, they are NOT categorized as tax payments.

Following the end of the tax year, the final tax bill will become known and it will be paid. Since at least a portion of the total taxes owed have already been "transferred" from the Quicken/real-world tax payment account, you cannot record your taxes-paid as a withdrawal from the Quicken tax payment account, as that would alter the balance of that account, making it out-of-balance with the real-world account.

By recording a net-$0.00 split transaction in the Quicken tax-payment account with 2 split lines (at least for the simple case referenced in the FAQ), you can record your taxes paid in the correct tax year without altering the balance of the tax payment account.

Such a net-$0.00 split transaction might look like this:
- Date = December 31 of tax year
- Payee = your choice
- Split line 1:
-- Category = your taxes-paid category
-- Amount = total actual amount of taxes paid for the tax year
- Split line 2:
-- Category = [Estimated taxes]
-- Amount = same as split line 1 - with opposite algebraic sign of split line 1

That net-$0.00 transaction should take care of accurately recording your taxes for the tax year in question.

As the FAQ notes, the net-$0.00 may not clear the Estimated Taxes account to zero, but that's not really critical. The Estimated Taxes account does not represent any real-world account, so there is no necessity (or possibility) to reconcile it to anything. It can retain a balance without doing any harm.

But as you note, you can enter a transfer in the Estimate Tax account with a category of [Estimated Taxes] with an amount that will zero the balance of the account.

You can also tell Quicken to "Keep this account separate-account will be excluded from Quicken reports and features". See the Display Options tab in the Edit Account Details dialog for the Estimated Tax account. That should keep it from interfering with reporting.

-JP

JoelC

https://community.quicken.com/discussion/comment/20403436#Comment_20403436

@mshiggins , I thank you for your above post and note:

Things I Understand

i) I understand that the amounts transferred to the [Estimated taxes] account are not recorded as taxes (i.e., they are estimates of the amount of taxes paid / owed).

ii) I understand that the [Estimated taxes] account can be kept separate and thus not included in the reporting.

iii) I understand the entry of the actual / final recording of the tax bill for year X (i.e., a) the actual taxes paid to the tax paid category and b) - actual taxes paid to the [Estimated taxes] account)

Things I Do Not Understand and For Which I Would Appreciate Responses

iv) As noted above, I understand the entry of the actual / final recording of the tax bill for year X. I do not understand the entry of the actual / final recording of the tax bill for year X in year X + 1. That is, the actual / final amount of the tax bill for year X must be recorded in the cash account register in year X+1 (the date that it is paid) so that the cash account bank statement reconciles. How is that amount categorized in the cash account in year X+1 so that the a) the cash account bank statement reconciles and b) the tax and other reporting is accurate?

v) I do not understand how the [Estimated tax] transfers are being treated for monthly reporting purposes. I would think that because they do not net / sum to zero for year X that they are being excluded. If this is correct then one of the challenges / weaknesses of this approach is that it does not allocate the taxes to each month but rather allocates taxes December of year X. Is this correct? What are your thoughts on this?

Other / Differences

vi) Assuming my understanding of v) above is correct, one of the differences between the FAQ suggested approach and my suggested approach is the allocation of taxes to each month. I am not suggesting that one approach is better than the other but rather noting the difference. What are your thoughts on this?

vii) The FAQ suggested approach addresses the tracking of taxes for year X where there is no mention / suggestion as to the treatment of the interim tax instalments for year X (unless the amount transferred to the [Estimated tax] account are net of the tax instalments). My suggested approach includes the treatment of the interim tax instalments for year X (which may be one of the reasons my approach seems more complicated). What are your thoughts on this?

***

I am very interested in your thoughts on this.

Thank you.

mshiggins

I don't have any answers for you. I don't even have any recommendations or suggestions ... all I have left is a couple of thoughts, that may, or may not, be of any value.

If you want to recognize the "estimated tax" paid on the date it was paid, but do not want to make multiple adjustment transactions to accomplish that, there are two approaches that might satisfy.

Option 1: If you are enamored of transferring the amount of each actual estimated tax payment to an "estimated tax account", you can designate each transfer transaction (in the account the tax was paid from) as a tax payment transaction.

To assign a tax line item to a specific transaction (including a transfer transaction), right-click the transaction, choose "Tax line item assignments". In the resulting dialog, choose the appropriate tax line item.

Option 2: If you aren't dead set on transferring the estimated tax payments to a separate "estimated tax" account: just categorize each estimated tax payment to its appropriate tax line item.

Either option still leaves any final year-one tax withdrawal/deposit made in year-two to be accounted for. You can record that transaction using the net-$0.00 split transaction already discussed here; with a date in the appropriate tax year.

-JP

JoelC

@mshiggins appreciated and thank you!

JoelC

Option 1: If you are enamored of transferring the amount of each actual estimated tax payment to an "estimated tax account", you can designate each transfer transaction (in the account the tax was paid from) as a tax payment transaction.

To assign a tax line item to a specific transaction (including a transfer transaction), right-click the transaction, choose "Tax line item assignments". In the resulting dialog, choose the appropriate tax line item.

Option 2: If you aren't dead set on transferring the estimated tax payments to a separate "estimated tax" account: just categorize each estimated tax payment to its appropriate tax line item.

@mshiggins , is my understanding correct that the need to assign the transfer to the appropriate "tax line item assignment" is so that the transfer appears in the P/L, cash flow and other reports (i.e., only transactions that are assigned to a "tax line item" will appear in business reports). That is, put another way, without the "tax line item assignment" the transfer will appear in a personal report.

Thank you.