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I started using GnuCash and have learned the basics of double entry bookkeeping for managing rental income. I have managed to create a working Chart of Accounts that works well and accurately (includes concepts like depreciation and withholding tax etc)

The only thing I haven't been able to do is: the tax authority where I live gives a tax deduction/relief/allowance/exemption of $1,000. How do I record this in a double-entry method? I thought I could record it as Expenses:Deduction since it will be used to offset the taxable income but what about the second entry? Where does that go? I tried Liabilities:Tax but something seems incorrect since if I record an expense in Expenses:Deduction, my Liabilities:Tax also increases instead of going down. Any ideas?

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You are entering it as an 'expense', because intuitively it is a deduction-esque thing on your tax return. However, you are conflating two concepts:

Your GNUcash reports are recording accounting income. Your tax return records taxable income. It is like a 2nd set of books. This is normal, because tax authorities often require things to be reported differently than regular accounting standards. As an example - your allowed amount of amortization for tax purposes would be based on tax depreciation tables, but for accounting purposes you might decide to amortize over a different period of time. For this reason, there might be a mismatch in your accounting income vs your taxable income in a given year.

So for accounting purposes, getting any sort of a tax payable reduction would be recorded as

Dr. Tax Payable [because the AP owed to IRS or whomever goes down]; and

     Cr Tax Expense [because your tax expense has been reduced]
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  • Thanks for the explanation. It helped me to understand a little better. However, when I follow your suggested entries for accounting purposes, the Income Statement generated by GnuCash shows a negative balance for the Expenses total due to the reduction by $1000 (all other expenses are small positive amounts) and it therefore does not reduce but increase my net income in the Income Statement. Can you please suggest entries that will let me generate an Income Statement for tax returns? The next income must reduce due to the tax credit
    – Marco
    Jan 29 at 15:17
  • @Marco If you are showing a total negative expense for tax, that tells me you haven't booked the tax entry to account for the regular tax you would be paying. ie: if you will pay 30% tax on $100k of pre-tax income, your tax entry should be dr tax expense 30k, Cr tax payable 30k. Including a 1k tax rebate, you should show tax expense 29k total, and tax payable 29k total. However on your tax return, you would need to 'reverse' these entries as you don't report tax expense as a deduction to the tax authority [it's like for them, the expense doesn't exist]. Jan 29 at 15:27

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