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From: R. C. White on 18 Jun 2010 00:15
Hi, Alan.

We first must ask you two questions. The most important is the one that
Laura asked: Is your business conducted as a sole proprietorship, or in
some other ownership, such as a corporation or a partnership? And the
second question is: Do you keep a separate set of books (or Quicken file)
for the business, or is it simply a part of your single Quicken file for
your family finances?

For now, I'll assume a sole proprietorship kept in your single family
Quicken file.

A sole proprietorship business does not pay any federal income taxes. The
owner of that business includes the business net income (or loss) in his own
individual income tax return. But this business income is only one part of
the tax return. That income must be combined with income from interest,
dividends, capital gains - and wages from a second job - or even profits
(and losses) from one or more other businesses. But even if the individual
has no income from any other source, the income tax calculated on the
business income is not an expense of that business.

Also, of course, the sole proprietor must calculate and pay Self-Employment
tax on that business net income; this SE tax is also not a business expense.
The income tax and SE tax are added together on Form 1040 and paid as a
single sum. The owner must estimate how much combined taxes will be due at
year-end and then pay the combined taxes (less any expected withholdings
from wages) in advance installments.

The business bank account belongs to the owner and he is clearly entitled to
pay his personal expenses from that account if he chooses. But he is not
entitled to deduct those payments as business expenses. If he keeps a
separate set of books for the business, then those payments on individual
taxes should be recorded as withdrawals by the owner, just as if he had
transferred money to his non-business checking account or cashed a business
check for personal use. Until it is applied to the actual tax as calculated
after year-end, the advance payments are an asset - but they are an asset of
the individual owner, not of the business. And when the advances are
applied to settle the actual tax bill, they become the owner's expense, not
business expense.

So, in the combined Quicken file, create a new Asset Account called
something like Prepaid Federal Income Tax. Charge each quarterly estimate
payment to this account. At year-end, there should be 3 payments in this
account. In January, add the 4th quarter payment to this account. In
April, when you know what the actual tax is, record it as an expense of the
prior year. That is, in April 2010, you should record the 2009 tax and date
the entry 12/31/2009. Record the entry in the Register for the Prepaid
asset account; charge the actual tax amount - NOT just the balance due - to
the Federal Income Tax Expense and Federal Self-Employment Tax Expense
categories, but code those categories as personal expenses, not expenses of
the business. That should leave a balance in your Prepaid account. If
you've overpaid, there should be a positive Prepaid balance left in the
account, equal to the refund you've calculated. If there is a balance due
on your return, it should equal the negative balance in your Prepaid
account, equal to the check that you must write by April 15, 2010.

That brings us to payments on the 2010 taxes. If you have an overpayment
for 2009 and elect to apply it to 2010, just leave the balance in the
Prepaid account and add any new checks to it. If you owe a balance for
2009, the Prepaid account should be back to zero after you charge that final
check to this account. At this point, AFTER settling for 2009 and BEFORE
starting on 2010, the Prepaid FIT account should be zero, except for any
refund applied to next year.

As I've hinted above, Alan, the answers for a corporate or partnership
business would be different. Please answer the questions we asked at the
beginning so that we can be sure our advice is appropriate. And remember,
I've been retired for 20 years, so check with your own CPA to be sure that
the rules haven't changed.

Sorry for such a long answer to your short question, but there are SO MANY
CONTINGENCIES that must be considered. Actual situations - with full facts
known - are MUCH easier to deal with than hypothetical situations with many
unknowns.

RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc(a)grandecom.net
Microsoft Windows MVP
(Using Quicken Deluxe 2010 and Windows Live Mail in Win7 x64)

"Cookiejar5" <alan.cook85119(a)gmail.com> wrote in message
news:1e34aeed-5e32-4d56-85d9-b1def5649e4f(a)w31g2000yqb.googlegroups.com...
> We are making quarterly estimated income tax payments from our
> business checking account. What is the Quicken "account type" for this
> payment? I have chosen "other asset" for now. Also what is the proper
> "tax line" assignment" for this payment. I have it set as "not tax
> related" for now. We cannot deduct our tax payments from our taxes so
> I do not think these payments should be an expense.
>
> Alan

From: jo on 21 Jun 2010 16:55
On Jun 18, 12:15 am, "R. C. White" <r...(a)grandecom.net> wrote:
<snip>
>
> That brings us to payments on the 2010 taxes.  If you have an overpayment
> for 2009 and elect to apply it to 2010, just leave the balance in the
> Prepaid account and add any new checks to it.  If you owe a balance for
> 2009, the Prepaid account should be back to zero after you charge that final
> check to this account.  At this point, AFTER settling for 2009 and BEFORE
> starting on 2010, the Prepaid FIT account should be zero, except for any
> refund applied to next year.
>
> <snip>
 Actual situations - with full facts
> known - are MUCH easier to deal with than hypothetical situations with many
> unknowns.
>
> RC

RC,

I've just adopted your system this year and understand how to do the
estimated tax payments, but I still don't understand what kind of
entry to start the Prepaid account with, given that I overpaid 2009
taxes and applied the balance to 2010. How to I get that starting
vaue into the account?

jo
From: R. C. White on 22 Jun 2010 18:30
Hi, Jo.

Well, it's easier to "start at the beginning", with a zero balance, of
course.

You probably will need to start your Prepaid FIT account with an entry dated
12/31/09. Use the numbers from your 2009 Form 1040, since you have already
filed that return and no longer have to "estimate" anything for that year.

Since I don't know (and don't really need or want to know) the amounts you
prepaid for 2009 or your actual tax for that year, I'll just make up some.
:^} I don't even know if you had taxes withheld from a paycheck, so I'll
just assume that you did not. And I don't know what Account or Category you
used when you entered your 2009 tax payments.

Assume you estimated in April 2009 that your 2009 tax would total $4,000 so
you paid $1,000 on each of 4 estimated tax payments on the April, June,
September and January (2010) due dates, and you recorded each of those
payments as Income Tax Expense. But, when you filed your 2009 return in
April 2010, your actual tax for 2009 was only $3,200, so you had an $800
overpayment, which you applied to your first estimate for 2010. And, let's
assume your 2010 estimated tax is $3,600.

OK. With those numbers, your 12/31/09 entries would be:
First - to create the Prepaid Tax account with your 3 payments made in 2009:
Prepaid FIT $3,000
Income Tax Expense $3,000

Second - to record your actual tax expense for the year:
Income Tax Expense $3,200
Prepaid FIT $3,200

(Quicken doesn't really provide for what accountants call a "journal
entry" - and entry that doesn't involve some kind of cash account Register.
Just pick an Account, any Account - Checking might be a good one - and make
a zero-amount entry in its Registry. To make that entry, create a Split
transaction with all the plus entries equal to all the minus entries -
debits equal credits, as we say - so that the "total" is zero.)

At this point, you've recorded the actual $3,200 tax expense in 2009, and
you have a $200 negative balance in your asset account at the end of 2009,
showing that you OWE $200 as of 12/31/09. When you made your 1/15/10
estimate and charged that $1,000 to the Prepaid account, it would leave the
$800 overpayment as a positive balance in that account.

Then, in April 2010, your first $900 estimate payment for 2010 would have
$800 covered by your overpayment. You would send a check for $100, and
after you add that amount to Prepaid, the balance would be $900.


As I said Jo, it's easier to deal with REAL numbers than hypothetical ones.
You'll have to adjust my made-up numbers to fit your real-life situation.

RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc(a)grandecom.net
Microsoft Windows MVP
(Using Quicken Deluxe 2010 and Windows Live Mail in Win7 x64)

"jo" <phillysleuth(a)verizon.net> wrote in message
news:ae6427fc-2dc1-4492-a703-ee33b462d91c(a)d8g2000yqf.googlegroups.com...
> On Jun 18, 12:15 am, "R. C. White" <r...(a)grandecom.net> wrote:
> <snip>
>>
>> That brings us to payments on the 2010 taxes. If you have an overpayment
>> for 2009 and elect to apply it to 2010, just leave the balance in the
>> Prepaid account and add any new checks to it. If you owe a balance for
>> 2009, the Prepaid account should be back to zero after you charge that
>> final
>> check to this account. At this point, AFTER settling for 2009 and BEFORE
>> starting on 2010, the Prepaid FIT account should be zero, except for any
>> refund applied to next year.
>>
>> <snip>
> Actual situations - with full facts
>> known - are MUCH easier to deal with than hypothetical situations with
>> many
>> unknowns.
>>
>> RC
>
> RC,
>
> I've just adopted your system this year and understand how to do the
> estimated tax payments, but I still don't understand what kind of
> entry to start the Prepaid account with, given that I overpaid 2009
> taxes and applied the balance to 2010. How to I get that starting
> vaue into the account?
>
> jo

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