Income Tax and HST return

SarahSarah Member Posts: 10

Can anyone tell me the proper way to categorize Income Tax payments to CRA in Wave? I am also wondering how to categorize my HST refund. I assume these are not typical income and expense accounts but am not sure how to account for them. Thanks!

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Comments

  • AlexiaAlexia Member Posts: 3,314 ✭✭✭✭

    Hi, @Sarah.

    You'd handle those with journal transactions. We have a small guide on the Help Center for that exact situation, and you can find it here. Let me know if that helps!

  • SarahSarah Member Posts: 10

    Thanks @Alexia! That article is helpful for the HST refund (sales tax) but I am still unsure how to categorize our Income Tax payment (taxes owed to CRA on net income).

  • AlexiaAlexia Member Posts: 3,314 ✭✭✭✭

    Hi @Sarah.

    That would simply be an expense transaction categorized to an account of your own creation (an expense account called "Income Tax Payments"). You could also record it as a Bill for more details on the transactions.

  • ThomasTomaszewskiThomasTomaszewski Member Posts: 2

    @Alexia , please allow me to dig this up.

    If I expense my Income Tax, wouldn't this impact my net earnings result? Income Tax is not a deductible expense, so how to make sure to reflect this in Wave?

    edited November 1, 2019
  • AlexLAlexL Administrator Posts: 2,869 admin

    Hey @ThomasTomaszewski . Because taxes vary region to region, I'd highly recommend reaching out to an accountant who should be able to advise you on this some more. By expensing your income tax you're heading into complex accounting territory.

  • ThomasTomaszewskiThomasTomaszewski Member Posts: 2

    @AlexL said:
    Hey @ThomasTomaszewski . Because taxes vary region to region, I'd highly recommend reaching out to an accountant who should be able to advise you on this some more. By expensing your income tax you're heading into complex accounting territory.

    Hi @AlexL, many thanks for your feedback! That's exactly my point, I want to avoid expensing income tax. As this is a strict question about Wave functionalities accountant will be no wiser.

    Is there a possibility in Wave to create an account that is not classified as an expense?

    edited November 19, 2019
  • AlexLAlexL Administrator Posts: 2,869 admin

    @ThomasTomaszewski The way that reporting works in Wave is that whatever you enter in your business profile, will show up in the report. Because of this, if you're adding a business transaction in any shape or form, it will appear in your reporting.

    Knowing that there may be jurisdictional consequences for you, I'd advise that you reach out to an accountant, but as I mentioned above, this will always show up in your reports.

  • Daniel_Nanton_CRDaniel_Nanton_CR Member Posts: 8

    I have the same issue, maybe with an example on how to file the Income Tax Paid in Canada or in some other country, it would give me an idea on how to do it.

    Can somebody share an example on this matter?

  • SandyLSandyL Member Posts: 33 ✭✭

    Hi Daniel - I just posted this in another discussion, then saw your question. I'm not an accountant and have the same question. This is how I sorted it out and what I posted:

    This is a three step process that I just tried: set up a liability account, move money into it from your bank account, then pay taxes using the new account as an expense category.

    1. Under Accounting > Chart of Accounts> Liabilities and Credit Cards > Other Short Term Liability, I set up an account and called it Federal Income Taxes.

    2. I then went to Accounting > Transactions > More > Add Journal Transaction and moved money from my bank account to the new Federal Income Taxes account. Now the money shows up in my Balance Sheet as a Short Term Liability and my operational expenses are not impacted.

    FYI - The new account shows up separately in the list of accounts under the Transactions heading, and the amount I 'transferred' there is listed under that account.

    1. To pay the taxes, I moved money from my business account to the new Federal Taxes account by: Accounting > Transactions > Add expense. Enter a Withdrawal from bank account and select Category: (new account) Federal Income Taxes. (this was near the bottom of the list under Liability Accounts)

    This moved the payment out of my bank account and deducted it from the short term liability account. No expense showed up under Operational Expenses and the Short Term Liability was reduced accordingly in my Balance Sheet.

    Seems to work!

  • NirNir Member Posts: 1

    Hi @SandyL.
    I tried out your solution and though it fixes the P&L, the balance sheet does not preset the right data. Does it work for you?

    Nir

  • SandyLSandyL Member Posts: 33 ✭✭

    Hi Nir, in the end I created a new account under the Equity>Retained Earnings: Profit Chart of Accounts and payed my tax bill from there. I named the account Federal/Provincial Income Tax, so that it's clearly shown on my Balance Sheet as such. Doing this eliminates having the expense as an Operational Expense on the P&L.

    This type of payment seems to be a gap in the Wave app. It would be great if they would add a tax function similar to the Sales Tax...

    Cheers and please let me know if you find a better way.
    Sandy

  • AlexLAlexL Administrator Posts: 2,869 admin

    @SandyL Hey Sandy, I can't believe you're not an accountant because you're on absolute fire 🔥. Thanks so much for helping out @Nir .

    edited March 5, 2020
  • SandyLSandyL Member Posts: 33 ✭✭

    LOL - glad I could help :)

  • NiranjanDNiranjanD Member Posts: 11
    @SandyL said:
    > Hi Daniel - I just posted this in another discussion, then saw your question. I'm not an accountant and have the same question. This is how I sorted it out and what I posted:
    >
    > This is a three step process that I just tried: set up a liability account, move money into it from your bank account, then pay taxes using the new account as an expense category.
    >
    > * Under Accounting > Chart of Accounts> Liabilities and Credit Cards > Other Short Term Liability, I set up an account and called it Federal Income Taxes.
    >
    >
    > * I then went to Accounting > Transactions > More > Add Journal Transaction and moved money from my bank account to the new Federal Income Taxes account. Now the money shows up in my Balance Sheet as a Short Term Liability and my operational expenses are not impacted.
    >
    >
    >
    > FYI - The new account shows up separately in the list of accounts under the Transactions heading, and the amount I 'transferred' there is listed under that account.
    >
    >
    > * To pay the taxes, I moved money from my business account to the new Federal Taxes account by: Accounting > Transactions > Add expense. Enter a Withdrawal from bank account and select Category: (new account) Federal Income Taxes. (this was near the bottom of the list under Liability Accounts)
    >
    > This moved the payment out of my bank account and deducted it from the short term liability account. No expense showed up under Operational Expenses and the Short Term Liability was reduced accordingly in my Balance Sheet.
    >
    > Seems to work!

    Hi Sandy,

    I'm a little confused about your 2nd and 3rd step. They both look quite same to me. In 2nd step, you said you moved money from bank account to Federal Income Tax. And in the 3rd step , again you say that while paying tax, you withdraw money from bank account to Federal Income Tax category.

    Can you please clarify this?

    Also, creating a short term liability account for income tax would mean that tax is accrued, but not paid yet. In that case, if you add a transaction for moving money from Bank to ST liability account, would reduce you bank balance for something you haven't paid yet. Also, you liability account would have a negative balance, effectively making it an asset.


    And if you have actually paid the tax, then showing it in balance sheet would be wrong, wouldn't it?
  • NiranjanDNiranjanD Member Posts: 11
    Hi @SandyL

    I'm little confused about your 2nd and 3rd steps.

    In the 2nd step, you said you move money from bank to the Federal Income Tax, which is a ST Liability account. In 3rd step, you said that when you pay the taxes, you withdraw money from Bank into Federal Income Tax account.

    Aren't these two steps doing the same thing?

    Also, creating a ST Liability account would effectively mean that amount is due but not paid. This is also know as Tax accrued in accounting terms. In that case, if you move money from Bank to Federal Income Tax account, you bank balance would reduce for something that you haven't paid yet, and your bank balance shown would be incorrect. Also, your Federal Income Tax account, which is a ST liability account would have a negative balance, effectively making it an asset.

    While if you are actually paying the tax, then this entry would again be wrong as tax is an expense, and must be shown in Profit and Loss statement, and cannot be shown in Balance Sheet as liability.
    edited March 21, 2020
  • JigarJigar Member Posts: 8

    @NiranjanD said:
    Hi @SandyL

    I'm little confused about your 2nd and 3rd steps.

    In the 2nd step, you said you move money from bank to the Federal Income Tax, which is a ST Liability account. In 3rd step, you said that when you pay the taxes, you withdraw money from Bank into Federal Income Tax account.

    Aren't these two steps doing the same thing?

    Also, creating a ST Liability account would effectively mean that amount is due but not paid. This is also know as Tax accrued in accounting terms. In that case, if you move money from Bank to Federal Income Tax account, you bank balance would reduce for something that you haven't paid yet, and your bank balance shown would be incorrect. Also, your Federal Income Tax account, which is a ST liability account would have a negative balance, effectively making it an asset.

    While if you are actually paying the tax, then this entry would again be wrong as tax is an expense, and must be shown in Profit and Loss statement, and cannot be shown in Balance Sheet as liability.

    Thanks @NiranjanD for bringing this up. and Thanks a lot @SandyL for helping everyone here.
    I am requoting this as I have the same confusion. Can you please explain the difference between step 2 and step 3? Also, your next post mentions that you ended up creating Retained Earning: Profit account. Does that mean, the 3 step process you mentioned doesn't work and creating Retained Earning: Profit account is the only option available for now?

  • SandyLSandyL Member Posts: 33 ✭✭

    Hi, it really depends on if you're tracking _a long-term liability over the year or _paying your taxes. I now pay my taxes directly from the Retained Earning: Profit account (that I created and called Federal Income Tax) but if I'm just tracking taxes (which I've stopped doing as it doesn't really help) then I'd set up a Liability account (Step 1 and 2 waaay above in this chain) to indicate that not all my current revenue is clear profit. Your bank might care about that if you're seeking financing but as long as you realize you owe the taxes and don't over spend, then there's really no need to track the tax liability.

    If you are tracking using Steps 1 and 2, then Step 3 as listed above might not work, I've not used that method for awhile so I'm not sure. In a pinch, I'd just the move the liability back into your revenue by reversing Steps 1 and 2, and just pay your taxes with Retained Earnings account that you'll need to add to your Chart of Accounts.

    Again - if the Wave is peeking in on this discussion, it would be great to have a mechanism where a declared amount of income tax could be deducted from earnings and put in the right place :-) kinda like sales tax but not quite...that would keep the P & L more accurate along the way.

    I hope this helps - if not, lets keep the discussion going, we're bound to attract the attention of an accountant sooner or later. LOL.

  • NiranjanDNiranjanD Member Posts: 11
    > @SandyL said:
    > Hi, it really depends on if you're tracking _a long-term liability over the year or _paying your taxes. I now pay my taxes directly from the Retained Earning: Profit account (that I created and called Federal Income Tax) but if I'm just tracking taxes (which I've stopped doing as it doesn't really help) then I'd set up a Liability account (Step 1 and 2 waaay above in this chain) to indicate that not all my current revenue is clear profit. Your bank might care about that if you're seeking financing but as long as you realize you owe the taxes and don't over spend, then there's really no need to track the tax liability.
    >
    > If you are tracking using Steps 1 and 2, then Step 3 as listed above might not work, I've not used that method for awhile so I'm not sure. In a pinch, I'd just the move the liability back into your revenue by reversing Steps 1 and 2, and just pay your taxes with Retained Earnings account that you'll need to add to your Chart of Accounts.
    >
    > Again - if the Wave is peeking in on this discussion, it would be great to have a mechanism where a declared amount of income tax could be deducted from earnings and put in the right place :-) kinda like sales tax but not quite...that would keep the P & L more accurate along the way.
    >
    > I hope this helps - if not, lets keep the discussion going, we're bound to attract the attention of an accountant sooner or later. LOL.

    @SandyL as per your explanation above, I think the step 1 and step 2 are still incorrect to track the tax liability. As I mentioned in my previous post, in Step 2 you said to move money from bank to Income Tax account. In this case, your bank account would be reduced for an expense that you haven't actually paid. And also, the Income Tax account will have a negative balance, which would effectively make it an asset account (although it will still show in Liability side of balance sheet)

    I think the right transaction entry for tracking the Income Tax, would be adding transaction with account as Income Tax (ST Liability), choose withdraw, and choose category as retained earnings/owner's equity.

    That way, your bank/cash balance will not be affected and the Income Tax account will now have positive balance as it should have.

    Also, ideally, the ST liability account should be named as "Income Tax Payable", while "Income Tax" should be an expense account. Since Wave doesn't yet have option for operating expenses, this will have to be added in Operating Expenses category.


    Let me know your thoughts on this.
  • SandyLSandyL Member Posts: 33 ✭✭

    Hi,
    I'm not quite following your steps but I think we might be trying to achieve different results. In Canada, corporate income taxes are not operating expenses. If they were, this would be a simple expense transaction and withdrawal, like any other.

    My situation is this:
    $200 retained earning from previous years
    $100 revenue for year ending 2019
    - 25 operating expenses
    = 75 net earnings (also known as EBITA) for 2019
    $200+ $75 earnings = $275 total retained earnings
    - $7.50 2019 income tax (10% of $75 net earnings)
    = $267.50 retained earnings heading into 2020

    My $7.50 tax payment could actually come from my personal bank account, it really wouldn't matter to the Canadian tax agency (CRA) or it could come from my retained earnings which is how I prefer to make the payment. To do so, I created an account to withdraw the payment from, so that I can show the CRA how I'm spending my retained earnings - if I were withdrawing this to pay myself dividends, the CRA would expect me to file a T5 form to indicate this and I would need to claim that amount on my personal taxes, so this accounting for the tax withdrawal is important.

    Once I pay the tax owing, my retained earnings will reduce accordingly. My P&L for that year will show $75 profit and will not show or include my income tax payment.

    Are you filing in Canada? If not, your situation might be quite different.
    Cheers,
    Sandy

  • NiranjanDNiranjanD Member Posts: 11
    @SandyL Ok, I understand your point now. However, my query was is it ok to show income tax in Balance Sheet? I'm not for Canada, so I dont exactly know the rules for Canada, but I have seen financial statements of many Canadian Corps. And I never saw taxes being recorded in Balance Sheet. I understand that rules might be different for a corporation and small/ medium sized businesses.

    Also, I understand that tax is not an operating expenses, and this is something Wave needs to fix by adding a category for Non-operating Expenses. I've created a post in new accounting features section for this, hopefully, if enough people comment on it then may be the developers will look into it.
  • SandyLSandyL Member Posts: 33 ✭✭

    Hi,
    That's been the problem all along - no, the tax payment really shouldn't be on the balance sheet but I've not been able to get it on the P&L without accounting for it as an operating expense. It should be listed on the P&L, after the EBITA amount, as a separate entry (like above). After subtracting your taxes from your EBITA total, you'll have your net income which will become Retained Earnings for the next tax year(s). This is really easy to do if you're doing books on paper, but in the Wave software it doesn't seem possible. At least I haven't found the way to do so.

    If you are tracking your taxes as a short term liability, though, then that liability should be listed on your balance sheet.

    I'll keep looking for a way to do this, as it's important to have it recorded correctly. My Retained Earnings solution is really just a work-around that gets the job done.

    Cheers,
    Sandy

  • SandyLSandyL Member Posts: 33 ✭✭

    Correction to my use of the term EBITA, I should have said EBIT. Amortization (depreciation) expenses are operating expenses, so should be recorded as such.

  • JigarJigar Member Posts: 8

    @SandyL I am in same situation as you and from Canada. Let's follow the same figure as yours.
    $200 retained earning from previous years (2018)
    $100 revenue for year ending 2019

    • 25 operating expenses
      = 75 net earnings (also known as EBITA) for 2019
      $200+ $75 earnings = $275 total retained earnings

    • $7.50 2019 income tax (10% of $75 net earnings)
      = $267.50 retained earnings heading into 2020

    According to Canadian laws, as the tax owing is below $3000, corporation doesn't have to pay tax installments during 2019. All the tax balances have to be paid withing first 3 months of 2020.

    So our tax balance is $7.5 which let's say we pay somewhere in March 2020.

    As this transaction will take place in 2020, wouldn't the balance sheet of 2019 be unaffected?

    I mean Retained earning for 2019 will still be $275.
    And this also will reduce the retained earnings of 2020 by $7.5.

  • SandyLSandyL Member Posts: 33 ✭✭

    Yes, that's true the retained earnings would only be only impacted in the fiscal year you make the payment. Although, if you record a Short Term Liability of $7.5 during 2019, this would show up in your 2019 Balance Sheet as a liability. I didn't do that when I filed my 2019 T2 and the CRA assessed my taxes and didn't ask for me to show the liability even though I actually owed +10K. It's really a case of who in your business cares about what. The CRA doesn't really care about you reporting your tax liability, as they know immediately upon receiving your T2 how much you will be paying. It would be best practice, though, to include any liabilities on your Balance Sheet.

    Perhaps the Wave will fix this (or show us how to manage it). You can vote on this feature at Niranjan's feature request for Non-operating Expenses posted earlier at https://community.waveapps.com/discussion/7710/non-operating-expenses-and-recurring-expenses#latest

    Cheers,
    Sandy

  • JigarJigar Member Posts: 8

    Upvoted!!! Thanks @SandyL for bringing this up.

  • NiranjanDNiranjanD Member Posts: 11
    > @Jigar said:
    > @SandyL I am in same situation as you and from Canada. Let's follow the same figure as yours.
    > $200 retained earning from previous years (2018)
    > $100 revenue for year ending 2019
    >
    > * 25 operating expenses
    > = 75 net earnings (also known as EBITA) for 2019
    > $200+ $75 earnings = $275 total retained earnings
    >
    >
    > * $7.50 2019 income tax (10% of $75 net earnings)
    > = $267.50 retained earnings heading into 2020
    >
    >
    >
    > According to Canadian laws, as the tax owing is below $3000, corporation doesn't have to pay tax installments during 2019. All the tax balances have to be paid withing first 3 months of 2020.
    >
    > So our tax balance is $7.5 which let's say we pay somewhere in March 2020.
    >
    > As this transaction will take place in 2020, wouldn't the balance sheet of 2019 be unaffected?
    >
    > I mean Retained earning for 2019 will still be $275.
    > And this also will reduce the retained earnings of 2020 by $7.5.

    I dont think the retained earning for 2019 would be $275. As per accounting rules, a entry has to be made when transaction is accrued, regard less of whether its paid or not. In case you are paying the tax in 2020, you should still have an entry post-EBIT for Income Tax Provision, based on estimated tax liability. So, if you know that your tax would ~$7.5, you will record it as provision and you retained earnings would be $275 – $7.5 = $267.5.


    The Income Tax Provision would then be be recorded in Balance Sheet as ST Liability
  • BowjestBowjest Member Posts: 17

    @SandyL
    Hi, Sandy. Thanks for taking the time to contribute so much on this topic. I have to say I'm also amazed that Wave doesn't have a built-in process for handling this.

    And I'm sorry to be flogging what must seem like a dead horse, but would you mind explicitly laying out your steps for paying your taxes?

    I got lost after going through the original steps above and you then had a rethink of things and revised your system further down in the thread.

    Do I need to just disregard the original 3 steps and move to the bit about creating a an entry under Equity>Retained Earnings: Profit Chart of Accounts and paying your taxes from there? If so, can you outline the exact steps you use? Numbers are sadly not my strong suit, so I struggle with understanding how so much of this works.

    Many thanks in advance,

    Bowjest

    edited June 6, 2020
  • SandyLSandyL Member Posts: 33 ✭✭

    Hi Bowjest,

    My original solution was a lot of steps and in the end, the P&L only showed the transactions as liabilities, once I made the tax payment, those liabilities were removed from the P&L, so I didn't gain anything! So, I now use the simpler method and I'm happy to share what I do for that.

    Before you start, you should check your P&L Net Profit amount and your Balance Sheet Total Equity amount, so that you can check at the end to ensure that the Net Profit remains the same and the Total Equity reduces by the amount of taxes you pay.

    Steps
    1. Go to: Accounting > Chart of Accounts > Equity tab > Retained Earnings: Profit > Add a New Account
    2. Fill in the fields:
    Account Type: Retained Earnings: Profit
    Account Name: Federal/Provincial Income Tax (is what I called mine)
    3. Save (your tax account is now ready for withdrawals)
    4. Go to: Accounting > Transactions > Add expense
    5. Select your bank account
    6. Total amount: enter the amount of your tax payment
    7. Category: (find the account you just created, listed under Equity Accounts) Federal/Provincial Income Tax
    8. Save
    As suggested above, check your P&L (nothing should have changed) and your Balance Sheet to see your new account (Details tab > Equity section) with the payment listed and your Total Equity reduced by the amount you entered.

    I hope this helps, let me know if you have questions, I'd be happy to help.
    Cheers,
    Sandy

  • BowjestBowjest Member Posts: 17

    Thanks, Sandy. I really appreciate you taking the time to do that. :)

    I'll work through that and do the checks you mention and let you know how I get on. Hopefully this will sort things out. I'm sure I will have at least a few questions. I really don't handle maths well. :)

    If Wave ever come up with a built-in solution for this and recurring expenses it will be the perfect solution for my very mundane accountancy and tax needs.

    I hope you have a good Sunday.
    Bow

    edited June 7, 2020
  • BowjestBowjest Member Posts: 17

    @SandyL Wow! That was much easier than I expected! Even for me! 😀

    I have one other question with regard to taxes I hope you can help me with. It may seem a bit daft, but that's the system over here.

    After my accountant does my books, I have an overall amount I must pay for the coming year (we do payment on account here in the UK and it's a real pain). So, if for instance, my accountant says I have a total tax liability of £1200, I will have to pay part of this sum in January of 2021 and the remainder in July of 2021. We'll say £600 each time for simplicity's sake, but it's never evenly split.

    What I've done so far in my current software (Bank) is as follows:

    I have a main account for all my incoming and outgoing and a second account for holding my tax money. In this way, each year I can shunt over the money I owe (in our example £1200) and know that it is ringfenced for the government.

    I do a simply transfer of money over to the tax account and it rests there until January and July of each year, when I transfer back over the appropriate sums and pay the taxman.

    Is there an easy way to do this that you know of in Wave without wrecking my main account of my books overall?

    I'm about to try just creating a second bank account called Tax Holdings, which shouldn't be a problem, but I really don't know how best to handle a transfer that won't mess up my P&L or equity in some way.

    Thanks for your help and I hope you don't mind the long-winded question.

    Best,
    Bow

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