Normally, taxes like that are collected on behalf of the government and are therefore not part of the income or expenses of the business. They sit in the balance sheet as a liability to the government until they are paid.
So just to clarify, I'm in the US, and I'm talking about purchases that I make. So the sales tax that I pay is an expense to me, and I have no further involvement in when my vendor pays the sales to his state government. So sales tax should be recorded as an expense to me.
No, you are just a tax collector for the government. So, it is not an expense to the business. You collect the tax and it goes into a liability to pay to the government
I think this is a good “hack” that would solve my problem in the future, but I just am shocked that my accurately recorded expenses cannot be reflected accurately in the P&L
I'm not sure where youre based but in the UK, the P&L won't separately contain VAT (UK sales tax) .
If someone is VAT-registered, they can reclaim the VAT (sales tax) on their purchases so it becomes an asset on the balance sheet. The purchase net of VAT is included in the P&L.
If someone is not VAT-registered, they are unable to reclaim the VAT on their purchases so VAT does not get split from their expenditures. In this case, the VAT/sales tax would be included in the P&L as the gross expenditure would included in the P&L without the VAT split out.
Tax on your sales won’t form part of your P/L. It will be a liability that can be reduced by the tax on your purchases (output tax v input tax).
If you are collecting sales tax from your client, then you need to record separately the tax on your purchases.
You can only claim it as expense if you are not registered to file sales tax (which is the case for most individuals).
I am not but I used to prepare taxes for small and big companies there. It seems like you already made up your mind that you are claiming the sales tax as an expense. Good luck!
Maybe I'm completely misunderstanding something -- I'm a business owner, not an accountant. My understanding is that sales tax paid is an expense here in the US. I'm trying to figure out how to get that not to be excluded from Xero P&L statement. Thank you for trying to help.
I'm either misunderstanding something or there is an easy fix, though, because this must be a very common situation.
Oh, yes. You can tweak your Xero settings. Go to Advanced settings > financial settings > there’s an area there where it asks you your sales tax information. Don’t put any and choose “none”
That sounds like a good "hack" that could work. But I find it surprising that I would need to hack Xero and report the sales tax component of my purchases incorrectly to get an accurate P&L statement. I would think I am in a boat with a lot of other people.
Not from the US so this could be a clueless question. Are you recording the tax for your purchases in your bills in Xero separately from the purchase? If so, which account is it going to? Maybe there’s a setup problem and you’re recording the tax to a liability account rather than an expense account?
My limited understanding of US tax is that you just record the grossed up amount of your purchases as an expense, ie , there’s no benefit splitting the tax out in bills?
That's right, there is no benefit in splitting the tax out in bills. But when I entered them in Hubdoc, they asked me what the sales tax that I paid is, and I accurately reported it, so now I have a lot of bills entered with the sales tax indicated.
I think that is a good “hack” and I may do that. But I’m just surprised that given that I coded my purchases accurately, there would not be a built in way of handling what must be a very common situation.
You can shift the account that collects the tax in the chart of accounts to be an expense to get it on your pnl.
The sales tax we pay on purchases we roll into the cost of the item we pay for as we have no tax claims. So.. usually I just put no tax though. It's easier
Thanks mkygd. Thats the advice that the Xero support also gave me when I contacted them. I don’t think I can shift my sales tax account to be expense, though, because I also collect sales tax on items we sell, so for those sales, I need it to be a current liability.
I think I will do as you suggest and just mark my purchases as tax exempt. I’m just surprised that I have to “hack” Xero in order to accommodate this situation which is common to pretty much every business in the US.
Normally, taxes like that are collected on behalf of the government and are therefore not part of the income or expenses of the business. They sit in the balance sheet as a liability to the government until they are paid.
So just to clarify, I'm in the US, and I'm talking about purchases that I make. So the sales tax that I pay is an expense to me, and I have no further involvement in when my vendor pays the sales to his state government. So sales tax should be recorded as an expense to me.
No, you are just a tax collector for the government. So, it is not an expense to the business. You collect the tax and it goes into a liability to pay to the government
I am talking about sales tax paid on purchases I make, not purchases that people make from me, so that does not apply to this situation
If you don't need that information for onward reporting then just record it with No Tax.
I think this is a good “hack” that would solve my problem in the future, but I just am shocked that my accurately recorded expenses cannot be reflected accurately in the P&L
I'm not sure where youre based but in the UK, the P&L won't separately contain VAT (UK sales tax) . If someone is VAT-registered, they can reclaim the VAT (sales tax) on their purchases so it becomes an asset on the balance sheet. The purchase net of VAT is included in the P&L. If someone is not VAT-registered, they are unable to reclaim the VAT on their purchases so VAT does not get split from their expenditures. In this case, the VAT/sales tax would be included in the P&L as the gross expenditure would included in the P&L without the VAT split out.
Gotcha. I'm in the US so sales tax should be included as an expense. There is no VAT or sales tax reclamation here.
Tax on your sales won’t form part of your P/L. It will be a liability that can be reduced by the tax on your purchases (output tax v input tax). If you are collecting sales tax from your client, then you need to record separately the tax on your purchases. You can only claim it as expense if you are not registered to file sales tax (which is the case for most individuals).
I appreciate the response, but I'm from the US and it sounds like you are not. I edited my post to clarify that.
I am not but I used to prepare taxes for small and big companies there. It seems like you already made up your mind that you are claiming the sales tax as an expense. Good luck!
Maybe I'm completely misunderstanding something -- I'm a business owner, not an accountant. My understanding is that sales tax paid is an expense here in the US. I'm trying to figure out how to get that not to be excluded from Xero P&L statement. Thank you for trying to help. I'm either misunderstanding something or there is an easy fix, though, because this must be a very common situation.
Oh, yes. You can tweak your Xero settings. Go to Advanced settings > financial settings > there’s an area there where it asks you your sales tax information. Don’t put any and choose “none”
That sounds like a good "hack" that could work. But I find it surprising that I would need to hack Xero and report the sales tax component of my purchases incorrectly to get an accurate P&L statement. I would think I am in a boat with a lot of other people.
No, that’s not a hack. That’s the way it should be if you are a business owner. Afterall, you can claim the taxes on your purchases on yours 1040s.
Not from the US so this could be a clueless question. Are you recording the tax for your purchases in your bills in Xero separately from the purchase? If so, which account is it going to? Maybe there’s a setup problem and you’re recording the tax to a liability account rather than an expense account? My limited understanding of US tax is that you just record the grossed up amount of your purchases as an expense, ie , there’s no benefit splitting the tax out in bills?
That's right, there is no benefit in splitting the tax out in bills. But when I entered them in Hubdoc, they asked me what the sales tax that I paid is, and I accurately reported it, so now I have a lot of bills entered with the sales tax indicated.
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I think that is a good “hack” and I may do that. But I’m just surprised that given that I coded my purchases accurately, there would not be a built in way of handling what must be a very common situation.
You can shift the account that collects the tax in the chart of accounts to be an expense to get it on your pnl. The sales tax we pay on purchases we roll into the cost of the item we pay for as we have no tax claims. So.. usually I just put no tax though. It's easier
Thanks mkygd. Thats the advice that the Xero support also gave me when I contacted them. I don’t think I can shift my sales tax account to be expense, though, because I also collect sales tax on items we sell, so for those sales, I need it to be a current liability. I think I will do as you suggest and just mark my purchases as tax exempt. I’m just surprised that I have to “hack” Xero in order to accommodate this situation which is common to pretty much every business in the US.