How to Apply A "Commercial Use Rate" to Operating Expenses and Sales Tax ITCs

DaveB

Hi,

I have a cottage rental business, which has a personal use aspect to it. So, in my jurisdiction, I need to apply an appropriate expense rate to operating expenses, and sales tax ITCs. Determining this rate is something I would do at the end of my tax reporting period, and then apply it across the various operating expenses and sales tax accordingly. For example, let's say:

1. I have a $100 operating expense, which was subject to $10 in sales tax (I like round numbers in examples).
2. For the same reporting period, let's say my commercial use rate is 80%.
3. I believe I need to create some Journal Transactions to adjust this, which:
4. $20 Credit - Operating Expense account and Debit - what kind of account?
5. $2 Credit - Sales Tax Liability account and Debit - what kind of account?

Because this is essentially to factor-out personal use by me (the Owner), can/should I use "Owner Investment/Drawings" as the debit account? Create a new account(s) to act as the debit account? If either is a valid approach, what would pros/cons potentially be?

Thanks in advance!
Dave

DaveB

It's been awhile since I posted this. Can anyone offer any advice as to what kind of account should be on the other side of the Journal Transactions? Or if if way off-base, I'd like to know.

Thanks,
Dave

JordanD

Hey @DaveB! In full transparency, this seems like it has some more complicated elements to it, in which an accountant might be better be suited to get you the answer that you need. As the Support Team here are not accountants, I wouldn't want to lead you in the wrong direction, especially keeping in mind that there is also sales tax included in the equation here. Curious if there is any Wave Pros that have more insight on the scenario here, but if not, I would highly recommend seeking out an accounting professional who would be better able to help you out here.

DaveB

Hi @JordanFromWave,
I appreciate your response. I don't really see this as a question for an accountant. My question is actually about the mechanics of ow to achieve what I need to achieve in Wave specifically. I simply need to factor-out the personal use component of expenses and sales tax. I have the rate that I want to apply, so how do I do it in Wave? The options for the opposite-side of the journal transactions are few - so Wave support should be able to at least provide options.
Thanks,
Dave

JamieD

You're correct that an adjusting entry is the way to go here, and it looks like the the first transaction is some kind of equity account (the transaction where you're crediting expense, debiting x), potentially a custom equity account so that, on the balance sheet, it’s clear as to what the adjustment is for. The same goes for the sales tax, although it could be an income account that’s credited if this is a refund for tax, rather than simply reporting/filing less.
What could work best is a thee line transaction:

debit $22 Sales Tax adjustment
credit $20 expense
credit $2 sales tax (edited)

However, I do want to reiterate what Jordan mentioned above. Since we’re not accounting professionals, we can advise on how to do something in Wave, but when we tell someone what account types to use, we risk providing inaccurate information that could have negative repercussions down the road. We always want to help weigh in in situations like these, but it’s no substitute for having the advice of an accounting professional.

DaveB

Thanks @JamieD,
That's very helpful. You've peaked my curiosity WRT the three-line adjustment - though I don't think I can take advantage of it. The commercial use rate (at least in my case) is something that I am not able to calculate until closer to my year end. So, it is something that I need to apply somewhat retroactively across all the applicable expense categories, and HST sales tax account. This adjustment really serves as a means to reduce the amount of ITCs, due to personal use, I can claim on operating expenses and sales tax - so this kind of adjustment theoretically wouldn't ever involve sales tax refunds (i.e. shouldn't involve an income account).
I agree that a custom equity account is probably best for the debit-side of the operating expense adjustments, for the reasons you've mentioned.
I'll try to make this concrete with an example:
If I were to create a custom equity account - let's call it "Owner- Personal Use", and let's say I have calculated an 80% commercial-use rate.. At the end of the year, I also have $1000 in ExpenseCategory1, $500 in ExpenseCategory2, and Sales Tax on Purchases of $300 (from those and other Expense Categories).
I had assumed that I would need to perform an individual adjustments (one for each expense category, and one for the sales tax) like so:
1. $200 CR ExpenseCategory1 DR Owner- Personal Use
2. $100 CR ExpenseCategory2 DR Owner-Personal User
3. $60 CR Sales Tax DR DR Owner-Personal Use
Is there a more efficient way to do this, with a fewer total number of adjustments? I've inferred that the three-line adjustment you've suggested is something that I would apply on a per-expense-transaction basis, if it were possible for me to know the commercial use rate at the beginning of the year, create the adjustments on an ongoing basis as the expense transactions come into Wave, rather than total adjustments at year-end.
Rest assured, that I appreciate the position of Wave Support, and everything I do as a result of your advice will be ultimately vetted by my accountant. As you've stated, I merely want to make it clear what's going on.
Thanks,
Dave

James_Hudson

Hey @DaveB ,

It's too bad you won't know the commercial use rate up front, because I'm a huge fan of @JamieD 's 3-line journal transaction solution.

Looking at your solution, it does appear as though this would be the best way to retroactively apply the rate that you receive at the end of the year. To make the journal transaction a bit cleaner, the total debit can be recorded to your Owner - Personal Use account, while additional credit lines can be added for each applicable expense account and sales tax.

I'm not totally sure how much manual calculation would have to be done on your end to determine which amounts are applied to which expense categories and taxes, but creating a journal transaction with the total debit applied to one account, and the credit split up as needed would allow you to consolidate the multiple different transactions into one larger one.

As for the frequency that these journal transactions can be entered in, I think that comes down to what will make the most sense for you and your accountant. If entering them yearly/quarterly is deemed accurate enough, then you can avoid entering them monthly or even more frequently.