Prepaid Taxes.

Question:

I have a client who deposits estimated federal and state amounts periodically. I took over an existing chart of accounts which shows the estimated tax deposits under "Other Current Assets". The procedure is that she has a certain amount withdrawn automatically from her business checking which goes into a special Savings. From that Savings she deposits (automatically) the estimated taxes. I'm confused about how and when to show the actual taxes as paid. I've been at this for 6 months and all amounts paid are showing up under Estimated Tax Deposit on the Balance Sheet, and not showing on the Income/Expense Report (naturally). Should I go into the Estimated Tax Deposit account and post an entry to Federal Tax Expense/State tax expense? I can't figure out how else to move it out of that asset account. I should know the answer to this but have forgotten how I did it in past years. Can you help? Thank you. Judy M.

Answer:

Income tax deposits are always a prepaid expense (asset) until the income tax return is filed (the tax return is essentially a bill for that years taxes). When you complete the return and determine how much tax you owe, you would make an entry from the prepaid tax account to the income tax expense account. If you paid more than you owe in estimated taxes and you get a refund, then that amount would go from the prepaid tax account to your cash account. If you choose to carry the amount forward to the next tax year, then the amount stays in the prepaid tax account.