[GNC] How to accurately record Use Tax

[Adrien Monteleone]

> On Feb 24, 2020 w9d55, at 7:05 PM, Christopher Lam <christopher.lck at gmail.com> wrote:
> 
> No private email please.
> I had detailed the posting of AP Bill in the future.
> 
> and post a bill, posting date is *01/12/2020*
> 01/12/2020 Use Tax due
> Expense:Use Tax $15
> A/Payable -$15
> 
> and in December 2020, clear the AP bill as usual.
> 
> 
> On Tue, 25 Feb 2020, 4:55 am Brandon Captain, <caibbor at gmail.com> wrote:
> 
>> Thank you for your response, I still have a few questions.
>> 
>> The problem that I see with your approach is that you've recorded the Use
>> Tax as an expense at the same time that you've made the purchase, but it
>> isn't an expense at that time. It's not an expense until you've actually
>> paid it, and in my case it won't even be the same year - purchases in all
>> of 2020 that I owe use tax on will be paid in March of 2021, and so on,
>> every year. Inflating my expense account with money that I haven't spent
>> yet is not representative of reality, and if I were to do it that way I
>> would have to remember to subtract that amount when reporting what my
>> *actual* expenses were.

Brandon, are you absolutely certain of this? Have you spoken to a local CPA?

That would be true if your books are on a cash-basis.

Many businesses operate on an Accrual basis, though some jurisdictions allow a cash-basis option.

The business features of GnuCash were designed for Accrual accounting. While some workarounds are possible for cash-basis with them, it is likely easier to do manual transactions for cash-basis books.

With the Accrual method, you would also likely follow something called the ‘Matching Principle’ which means your expenses should be booked in the period in which you incurred them in order to produce whatever revenue you recognized in that period. (which itself is based on when you earn it by providing goods or services, not when you get paid) The date you pay the expense off, doesn’t matter in that case. Jurisdictions of course vary in their rules, but in mine, Use Tax is incurred in one year and paid in the next. The liability comes into existence when the item is used in the business post-purchase, not on the filing/payment date. (or official ‘tax due date’) Which means the expense was incurred not on the date of payment, but in the prior accounting year that I’m filing for. You should really get official advice on this question for your specific circumstances.

Since a Use Tax is on products used in business (or which you didn’t pay sales tax on for some other reason) some jurisdictions might let you expense it over time if it is really large, though probably not more than 1 year. In such a case, each month would need an expensing adjustment from the initial reserve calculated at purchase. (similar to how depreciation or pre-paid expenses work, though in this case, you’re paying afterwards)

Regards,
Adrien