Accounting for Federal Tax Refund

Pop_BookKeeper001

Hi all!

I thought I would have found this topic in the archives but my search didn't turn up anything that helped.

I have a C-Corp w/ an S-Corp tax designation that received a Federal Tax Refund from the IRS for last year. I'm doing the 2019 Acct Recs and I'm not sure how to treat it. I was going to create a new account with just that title "Federal Tax Refund Income" or "Tax Refund" under an Income account but that doesn't sound right.

I saw somewhere online that it should be treated as a credit under Tax Expense account so treated I guess as a contra asset. Any insight or knowledge on this please. Thanks!

Other Info:
FL C-Corp
2019 First full-year in business
Two current Directors/owners

EDIT:
There's a category choice recommended in the app under "Sales Tax Refund from Government" and when I select that, there are no options, probably because I created nothing under that in the COA. But then when I go to the COA, I don't see that as a category to create a new account under such as "Federal Tax Refund".

Pop_BookKeeper001

EDIT:
The original post was for federal tax return but we also have a FL state tax return to account for.

Mikeg

@Pop_BookKeeper001,
I'm a little confused by some of the items you mention. They received a federal refund, but 2019 was their first full year in business. How did they get a refund and what was it for? They are an S-corp which only pay taxes taxes in limited situations. If they truly received a federal corporate tax refund then it would not be posted to the balance sheet unless you had accrued a refund receivable. You would just categorize as Other Income (or have owners take pro rata and code as distribution). Be sure that when the return is done the other income is treated as a book tax difference. That is because federal refunds are not a taxable income item (the expense is not deductible). However, if you are receiving a FL Income tax refund that would be included in taxable income for federal but would be a modification on FL. State refunds are not taxable at the state level.

Pop_BookKeeper001

@Mikeg said:
@Pop_BookKeeper001,
I'm a little confused by some of the items you mention. They received a federal refund, but 2019 was their first full year in business. How did they get a refund and what was it for? They are an S-corp which only pay taxes taxes in limited situations. If they truly received a federal corporate tax refund then it would not be posted to the balance sheet unless you had accrued a refund receivable. You would just categorize as Other Income (or have owners take pro rata and code as distribution). Be sure that when the return is done the other income is treated as a book tax difference. That is because federal refunds are not a taxable income item (the expense is not deductible). However, if you are receiving a FL Income tax refund that would be included in taxable income for federal but would be a modification on FL. State refunds are not taxable at the state level.

Thank you @Mikeg. The first full year was 2019. We had a partial year for 2018 (7 mos) when the company was founded, which was unprofitable.

And there would be no way to account for the book-tax difference within Wave correct? I would have to tag it and remember to do so. And I'm asking this question to anyone who knows the answer to this.

To make it easier for myself, I will create Tax Refund account under Other Income to easily differentiate.

Mikeg

@Pop_BookKeeper001,
The retained earnings would still agree as would the net income per books. It is similar to Travel and Entertainment. For tax purposes only 50% is deductible but Wave treats it as 100%. Same with the refund. I still do not understand how a federal income tax refund was received especially since 2018 was a loss.