Consider the following scenario:
- 1st Dec 2023:
A client pays $400 for 1 year of access to my service. I set aside $100 (25%) for taxes and take $300 (75%) for my business. - 15th Jan 2024:
I pay the $100 in estimated taxes to the IRS. - 15th Apr 2024:
Taxes are finalized for 2023. - 31st May 2024:
The client cancels their service and requests a refund for the unused 6 months. I oblige and refund them $200.
Ideally, $150 (75%) of the refund is from my business and $50 (25%) is from the taxes I’ve set aside; however, since the $50 was already paid to the IRS in my 2023 taxes, my business would now have a $50 deficit.
How do I document this in my books? How and when can my business recover the $50?
It all evens up when you file next years income taxes and get a refund.
If you need, you can show taxes payable as a credit, not a debit.
Not an accountant but took some accounting classes so am a little fuzzy
If they pay for a year up front you would need to recognize the first month as revenue and the other 11 months as a liability, since you owe them the service. So I guess technically you would only recognize about $35 in revenue for dec 23 and pay taxes accordingly for that. Assuming you are using the accrual basis of accounting. For cash based accounting, then you’d recognize it at time of sale.