Corporate Income Tax Refund Journal Entry


(Canada)

Hello,

What is the bookkeeping entry to record the corporate income tax refund from prior tax years?



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Hi,

I will assume that a bookkeeping entry was made each year ... once you had calculated the tax refund due as follows:

Dr. (decrease) Corporate Income Tax Payable (a current liability on your balance sheet)

Cr. (decrease) Income Tax Expense (an expense account on your income statement)


Any corporate income tax installments made do not affect your income statement. Installments are NOT income tax expenses ... so I will also assume that when your corporate income tax installments were made, bookkeeping entries for each year were made as follows:

Dr. (decrease) Corporate Income Tax Payable (current liability on your balance sheet)

Cr. (decrease) Cash in Bank (current asset on your balance sheet).

I am also assuming that if the Corporate Income Tax Payable account was a debit balance, at the appropriate year-end, the amount would have been reclassified by your accountant to Corporate Income Tax Refundable, a current asset account, as part of your year-end adjusting entries ... and reversed on January 1.


Once you receive your income tax refund, you would book the following entry to clear your payable account:

Dr. (increase) Cash in Bank ( a current asset on your balance sheet)

Cr. (increase) Corporate Income Tax Payable (current liability on your balance sheet)

Cr. (increase) Interest Income (income account on your income statement)



If you have any working papers, you will probably have an analysis of your corporate income tax payable by year. It is in your working paper file that you will allocate the refund to the appropriate years.

That said, I like to book the actual refund entry by year with good comments so that it is clear to anyone reviewing the general ledger what is happening in the account.

For all the bookkeeping entries, I like to make good memo notes about which year the entry pertains to.

Comments for Corporate Income Tax Refund Journal Entry

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Apr 22, 2011
Corporate Tax Payable
by: Bonnie

Corporate taxes paid are not a business expense. Why wouldn't the correct entry be for corporate taxes paid be:

DR - Retained earnings ??
CR - Corporate Taxes Payable



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Bonnie,

Retained earnings represents the net income and loss accumulated since the company's inception. At year-end, the net income (all income and expense accounts) are closed to the retained earnings accounts.

You never adjust the retained earnings accounts .... ever .... unless your accountant has given you an entry to book. The reasons to adjust retained earnings are far and few between.

I am curious, why do you feel that paying taxes, as a result of your business dealings, is not a business expense? If you weren't in business, you wouldn't be paying tax on the business income. Right?

Aug 18, 2011
Tax Refund
by: Anonymous-k

We have already paid the installments for corporate tax. At the end of fiscal year Tax Payable is nil.

We received a tax refund.

Can anyone help me to do the journal for the same?



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First go back and read the entries at the beginning of this post. Check to make sure you have booked each of the entries discussed.

Still stuck? Next draw some "T accounts" on a sheet of paper and work your way through your transactions.

If you have trouble with keeping your debits and credits straight, check out my "cheat" table.

Take the time to learn to think your way through your transactions.

Hint: If you received a tax refund, then I don't understand why / how your Tax Payable balance is nil. I would start with determining whether you booked your taxes for the year ... recording the tax instalments is not the same thing as recording your actual taxes due.

Nov 11, 2011
Corporate Tax Refund
by: Lucy Bizzo, Canada

We received a refund cheque for last fiscal year.

Our accountant did not accrue for it.

How should this refund be recorded in our books???

Nov 11, 2011
Corporate Tax Refund
by: Lake

If you are sure the entries talked about in this original post were not made, then this is the entry I would make:

Dr. (increase) Cash in Bank (current asset on your balance sheet)

Cr. (decrease) Income Tax Expense (an expense account on your income statement)



P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.

Nov 11, 2011
Omitted Accruals
by: Lake

I just thought I should follow up and explain what happens to your books when an accrual is omitted at year-end.

By failing to accrue the anticipated tax refund in the year it pertains to, your tax expense in the prior year was ovestated which understated your net income.

Your liabilities on the balance sheet were also overstated.

Over a two year period, this is a self-correcting error because when you book the entry this year, you will have corrected the over/under statements.

You are probably wondering why, if the transaction relates to the prior year, didn't it get posted to retained earnings.

GAAP permits adjustments to retained earnings for prior periods ONLY IF they are significant.

Normally, bookkeepers should not book entries to retained earnings (except shareholder dividends) ... let your accountant decide if the entry requires an adjustment to retained earnings ... because if this wasn't related to income tax, it would also affect your prior year tax return.

Nov 11, 2011
Thanks for tax information.
by: Kundan

Thank you very much.

Jan 04, 2012
Re:
by: Anonymous

Very helpful- Thank you!!

Nov 10, 2012
Compilation Question
by: Anonymous

Hi Lake,

My question is in regards to a small corporation that gets a public accounting firm to complete a compilation engagement (NTR) and file its Dec 31, 2011 year end T2.

If I understand correctly the corporation will leave its 2011 books/year open in QuickBooks or Simply. When the corporation receives the journal entry from the public accounting firm, say in Jan/12, it will make the required tax provision entry and then close its books for 2011.

Does the public accounting firm also tell the corp how much to prepay towards its 2012 return (installments) based off of its 2011 taxes payable? Does the corporation have to immediately pay all taxes owing for the 2011 year and also make installment payments towards its 2012 tax return?

I am also a bit confused in regards to what happens when the corp receives a refund. As expenses/revenues are transferred to retained earnings each year, the income tax expense account will have a 0 balance at the beginning of the year and at year end. Wouldn't the expense account show a credit position on the financial statements at year end if I make the refund entry?




Nov 12, 2012
Corporate Tax Refund & Year-end Adjusting Entries
by: Lake

Let's start with your last question.

If you go back and look at the entries, you will notice that your tax refund entry was booked to your payable account as follows:

Dr. Corporate Income Tax Payable (Refund)

Cr. Income Tax Expense

If the balance in the payable account was in a debit position, your accountant may have reclassified it to your accounts receivable.

By the time you receive your refund in the following year, your income tax expense account has nothing to do with receiving the funds. Your entry is between your payable/receivable and bank accounts so you clear your outstanding payable/receivable:

Dr. Cash in Bank

Cr. Corporate Income Tax Payable (Refund)

Cr. Interest Income

With regards your year-end adjusting journal entries (AJE), one of the entries should be to record a tax provision for 2011. Your accountant may also have other entries for you to record.

Once you have entered the AJEs, make sure you balance your balance sheet and income statement to the S100 and S125 filed with your T2. When they are balanced, then close your books.

In QuickBooks, this means you should be going in and entering a closing date so that you or others no longer book entries to that year.

It is my understanding that closing a year-end in Sage 50 - Canadian Edition (previously Simply Accounting) is much more complicated and less forgiving than QuickBooks requirement to just enter a closing date.

Your accountant should be reviewing your return with you. Part of that would be explaining your 2012 installment requirements.

Corporate taxes are due 2 months after year-end even though your filing deadline is 6 months after deadline. If you don't know your exact tax amount due, you must estimate the amount and pay it prior to the 2 month deadline to avoid penalties and interest charges.


Jan 05, 2013
Corporate Income Tax Refunds OR add't payments
by: Anonymous 378

Thanks all for your contribution to this site. It does help an overworked brain to think through fuzzy situations

I am now faced with a similar situation regarding the entries to make in the current year for a refund that was not accrued in the year to which it relates. It bothers me to credit expense in the current year because this offsets current year's accrual.

If at year end, the true position of the tax return is not known, An adjusting entry should be allowed at the time the information is available in order for each fiscal year to accurately reflect tax position/result.

Jan 31, 2013
T2 Corporate Income Tax
by: Anonymous

Hello,

Last year was our first year in business. We closed Sept. 30, 2012. The QuickBooks file was sent to an accountant who determined our corporate tax for the year.

I am now sending a cheque to pay this but am unsure how the accountant calculated the amount owed or how to enter the payment cheque in QuickBooks.

Should I be able to find this total in an expense account or do I need to make a post to an expense account and then apply the payment?

Thanks

Kim - Toronto



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Hi Kim,

The accountant should have done one of 2 things:

1. Given you year-end adjusting entries to post to QuickBooks; or
2. Posted the adjusting entries to their QuickBooks Accountant copy and returned it to you to merge with your active QuickBooks file.

If neither of those events occurred, your next step is to look at your T2 return and find Schedules 100-Balance Sheet and 125-Income Statement. Print your balance sheet and income statement in QuickBooks or your Trial Balance and compare the numbers to the two schedules.

You want to see if the accountant adjusted any of your balances. If balances don't match, it will be because the accountant made some year-end adjusting entries. Ask your accountant for a copy of the adjusting entries for you to post.

One of the adjusting entries was likely for Income Taxes. There should be an entry on the last day of your fiscal year, Sept. 30 in your case, that debits Income Tax Expense and credits Income Tax Payable. In QuickBooks, it is best to set this up using "Enter Bills".

When you go to pay your income taxes, use "Pay Bills" to clear the Accounts Payable you set up at year-end.

Hope this helps.

Feb 14, 2013
Corporate Taxes
by: Anonymous

Ok, that's great information.

This was our first year in business so the prior tax year was actually just the first year's business taxes. Sorry I should have said that right from the start.

Also it was a payment and not a refund. Are the entries basically the same still?



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Yes, same principles still apply.

Feb 18, 2013
corporate tax payable
by: Anonymous

Okay I posted everything and it all looks good. Thanks so much for your help!

Mar 10, 2013
Refund from Losses Carry Back
by: Anonymous

What about refunds created from non-capital losses carried back 3 years? How to record and how to treat the credit in the tax expense account on my income statement for tax purposes?

Aug 10, 2013
Loss Carryback
by: Anonymous

I have the same question as Anonymous above.

How do you account for an income tax refund that results from a loss carry-back going back three years?

Aug 26, 2013
Corporate Taxes
by: Anonymous

Can anyone help me with this year end journal entries in my Simply Accounting?

I have corporate taxes payable #2170 Debit and recovery of income tax #9998 credit which I don't have in my account list.

My question is where do I add this account #9998? Is it a expense or revenue? My Simply Accounting software doesn't let me to add the account #9998. I'm confused. Please help.

Sep 21, 2013
balance sheet vs T2 income tax return
by: Helen

Can anyone help on this?

Why does my balance sheet used for T2 (Sched100) have a tax payable balance, but my corporate tax return T2 shows tax refund?

Is it because the T2 includes a payment made after the fiscal year end date?

Thanks a lot for any help!



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Go back and review the entries at the beginning of this post and make sure you have booked all of them ... and in the correct time period.

Also make sure your balance sheet is "as at your fiscal year-end" date ... you need to compare apples with apples.

Sep 25, 2013
Journal entry for corporate income tax re-assessment for pervious year
by: Helen

What is the journal entry for income tax re-assessment.

my fiscal year end is 09/30/2012, on the income statement, the Income Tax for year 2012 is $5000.
the entry is:
Dr. Income Tax expense(current) (gifi code 9990),
Cr. Income Tax payable

after filing T2 at 02/28/2013, there is an income tax re-assessment, so the income tax for year 2012 became $4500.

But I cannot book this to last year (2012) income statement which has been filed, so it needs to go to 2013 income statement.

And in order Not to affect the current year (2013) Income tax account, I cannot book the $500 difference from 2012 re-assessment to Current Income Tax Expense account.

So the solution I could think of is to separate last year's income tax adjustment with current year income tax through 2 different accounts.

should I record the difference of $500 as below:
Dr. Income tax payable,
Cr. Business tax expense account (gifi code 8762) so it will go to the income statement of year 2013.

Thanks for your help!

Mar 16, 2014
Federal Refund
by: Anonymous

On our last year before converting from C Corp to S Corp, we have prepaid $15K in federal taxes. Our Federal Taxes were calculated to be $10K. $5K were recorded as refundable asset. Then our accountant has added $5k refund to S Corp income and I can't understand this: how something that was clearly overpaid and therefore returned can become your income?



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I don't do U.S. tax. It is my understanding that C Corporations are taxed annually on their earnings unlike S Corporations that do not pay federal income tax as the profit/loss flows through to the shareholder. I'm guessing but somewhere your corporation received a $5K tax deduction in the prior year. Bringing the overpayment in the following year offsets the prior year deduction. Like I said, I'm just guessing as I'm not familiar with U.S. income tax preparation.

It's a good question to ask your accountant why this happens.







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