T.I.P.P. = Tax Instalment Payment Plan
Generally here in our province of Manitoba, your property taxes are probably either due June 30th or October 31st .. depending if you live in the city or in the rural country. The city or municipality often offers you the option to pay your property taxes on a monthly basis, usually by automatic withdrawal from your bank account on the first of each month. The property taxes (and business taxes) run for the calendar year .. and generally are pre-calculated as a fixed amount until the new taxes for the current year become in effect. Then, the payment would be altered slightly and be adjusted if necessary. Sometimes the T.I.P.P. might be spread out over 12 months, and other times it might be spread out over 10 months. Here in Winnipeg, where the City administers both taxes, it is even possible to have 12 months or Property Taxes but only 10 months of Business Taxes.
For accounting purposes, generally speaking, if your fiscal year end is December 31st .. then at the year end date there should be no prepaid business or property taxes on your balance sheet.
But what if your fiscal year end is .. July 31st? September 30th? January 31st?
In most cases .. you may not have to adjust or setup prepaid business or property taxes .. if you are on the 12 month T.I.P. Plan. But some businesses and people may be on the 10 month plan or combination of the two as mentioned above. It is in these cases that there may be a need to setup prepaid business taxes in the G/L. T.I.P.P. are convenience for payments, and may not reflect the actual expense for the period.
I thought I would look at two examples of the need to look at the prepaid expense account, even though there are T.I.P.P. payments .. because you can’t just assume that there is no requirement to setup prepaid amounts .. and “pass” on this.
For our examples .. Let’s assume ….
* 2013 Property Taxes were $18,000
* 2014 Property Taxes were $18,000
* 2015 Property Taxes are $24,000
* 2016 Property Taxes will be $24,000
* Property taxes become due June 30th of each month.
* T.I.P.P. is based on a 10-month cycle, January to October
* T.I.P.P. for 2014 was: $1,800/month .. January 2014 to October 2014
* 2014 = (1,800 x 10 = 18,000)
* T.I.P.P. for 2015 was: $1,800/month .. January 2015 to June 2015, $3,300 July 2015 to October 2015
* 2015 = ((1,800 x 6 = 10,800) + (3,300 x 4 = 13,200) = 24,000)
* T.I.P.P. for 2016 will be: $2,400/month .. January 2016 to October 2016
* 2016 = (2,400 x 10 = 24,000)
EXAMPLE #1: Fiscal Year End August 31, 2015
Property Taxes in the G/L would be calculated to be $22,000 expense
* Sep/2014 to Dec/2014 >> 4/12 of the 2014 property taxes (18,000 x 4/12= 6,000)
* Jan/2015 to Aug/2015 >> 8/12 of the 2015 property taxes (24,000 x 8/12 = 16,000)
Prepaid Property Taxes as at August 31, 2015 would be calculated to be $1,400 prepaid.
* Actual 2015 T.I.P.P. made = (1,800 x 6) + (3,300 x 2) = 17,400
* Calculated expense for 2015 was calculated to be 16,000
EXAMPLE #2: Fiscal Year End March 31, 2015
Property Taxes in the G/L would be calculated to be $19,500 expense
* Apr/2014 to Dec/2014 >> 9/12 of the 2014 property taxes (18,000 x 9/12= 13,500)
* Jan/2015 to Mar/2015 >> 3/12 of the 2015 property taxes (24,000 x 3/12 = 6,000)
Prepaid Property Taxes as at March 31, 2015 would be calculated to be $-NIL-
Accrued Property Taxes Payable at March 31, 2015 would be credit ($1,500)
Sometimes it’s not as easy as taking the current calendar payments, and you must look at the expense – because this is the reason you are making adjustments to setup Prepaid amounts or setup Accrual amounts owing .. to reflect the proper expense in the general ledger. In this case ..
* 2014 actual payments Apr/2014 – Oct/2014 = (1,800 x 7 = 12,600)
* 2015 actual payments Jan/2015 – Mar/2015 = (1,800 x 3 = 5,400)
* 12600 + 5400 = 18,000 and it should be 19,500 expense so we are short $1,500 and an accrual has to be made.
(I should note that in the ‘real world’ .. setting up prepaid expense journal entries will also include the reversal of prior year’s calculations . this is just an example .. )
When You Are NOT on the T.I.P.Plan
The reason one might adjustment the business and property tax accounts on a monthly basis, or at the year-end .. is to make sure that the expense is correct for the fiscal period. I provided an examples above what to do when you are on a T.I.P. Plan that might be over 10 months .. But, what if you aren’t on the tax instalment payment plan? Should you be adjusting your expense accounts anyway? Or Leave it alone as an expense when paid?
I would adjust the expense
Generally, at least here in Manitoba .. property taxes are due either on June 30th (city) or October 31st (rural) .. and business taxes are due on May 31st. A lot of businesses just choose to pay it in full on or before the due date. Sometimes, for example in Winnipeg, if you pay PREpay your property taxes in February, you may be eligible for a discount. When I am preparing monthly financial statements for clients, I will ACCRUE the property taxes on a monthly basis, because often if I don’t .. each month there will show an unusually higher amount of profit .. and then in the month that property taxes are paid, there might be a huge loss, when the client writes a single cheque amount for payment in full.
Using my examples from my previous post .. let’s assume:
* 2014 Property Taxes were $18,000
* 2015 Property Taxes are $24,000
When it comes time to prepare the January 2015 monthly financial statements .. I don’t know what the new year’s taxes will be – however, I do know what last years was. I will accrue the following amount:
* 18,000/12 = $1,500/month (debit expense, credit accrued A/P)
By May 2015 .. my accrual will have (5 x 1500 = $7,500) year to date. In June 2015, when the company pays the annual property taxes in full .. this would be the journal entry that I would make.
Now – if I were preparing monthly CASH FLOW statements, it wouldn’t matter. But, as you know – cash flow is not the same as net income – and I prefer to ‘normalize’ the net profit accordingly.
|DR. Accrued A/P||
|DR. Propery Tax Expense||
|DR. Prepaid Expenses||
At June 30, 2015 = the property taxes expense should be (24,000 x 6/12 = 12,000). I would adjust the year to date to agree to this figure (12,000 – 7,500 = 4,500 additional expense in the month of June)
The prepaid expense of $12,000 would be adjusted between July and December at a rate of $2,000 per month. It should be noted, that this is following my “Balance Sheet Approach” method .. adjusting the Balance Sheet account ‘Prepaid Expenses’ what it should be at June 30th. I would not adjust it to the difference that wasn’t accrued January thru May ($24,000 – $7,500 = $16,500).
I hope that clears that up! I now there are a lot of accountants and bookkeepers preparing monthly financial statements and as the 2016 new year comes, you really should include an accrual for the outstanding business and property taxes that eventually will be paid. Sometimes, it might be just easier to take the “easy” way out, if you are holding off of the preparation of the monthly financials until the Year End has been completed, and may even know the “real” numbers as paid by company cheque. But, in this case I would still base the statements as if you did not know. This way, it may be consistent when the Profit and Loss are compared each year, in years you may have prepared the Year End early and just didn’t know what the real numbers were at the time.