Tardy Tax Bill Dilemma

Usually the taxing authorities that want your money are fairly prompt in mailing out their tax bills. This means that in a normal situation you will receive a tax bill and then be able to set it up to be amortized over the tax period in an orderly fashion.

Sometimes a tax bill won't get to you on time. You know that an expense amount has to be recorded in the current accounting period so you make a monthly journal entry as part of your month end accounting procedures. But now it's time to do the reconciliation and you haven't paid the tax in order to set up the amortizable item to show in the reconciliation.

In the academic world you would set up an accrued account to show that you had properly accrued the expense. This is actually the correct way to handle the item and if you did this, you would not have a problem with your reconciliations. You would probably use a List Reconciliation Type for the accrual and fill in the Close Date when you have actually paid the tax bill and set up an amortizable item for the remainder of the tax period.

In the real world of accounting you would use the practical solution of recording your normal expense entry with a debit to tax expense and a credit to prepaid taxes. This would create a situation where you have begun amortizing an item before you have actually paid the tax.

Let's assume the following situation:

• Property taxes for the City of Mayberry for the year 2011 were $10,800.00.
• Amortization was $900.00 per month in 2011.
• The 2012 tax bill is not received until February 2012.
• The amount of the tax bill for 2012 is $11,400.00.
• In January 2012 you made your normal journal entry to record an expense of $900.00 for the month and recorded a credit in your Prepaid Property Tax account - account number 1220.

The first realization you have is that when you start preparing your reconciliation for the month you have nothing to amortize. You haven't paid the tax bill yet!!!

You have already recorded the expense for the month and have a credit in your account, so now you have to figure out a way to show that in your reconciliation. Here is what you might record as your Reconciling Item for this account in January 2012:

As you can see, the explanation talks about the fact that the property tax bill had not yet been received. You should also notice that the amount is a credit (it has parenthesis around it). The actual reconciliation for the account would look like this:

Now comes February 2012. You have received the tax bill for $11,400.00 and paid it. Because the amount was greater than the prior year tax bill of $10,800.00, your amortization in January was not enough. It should have been $950.00 instead of the $900.00 that you recorded.

Here are the things that you should do in February.

• Record the amortization of the 2005 taxes through the end of February. This would be:
  • $950.00 for the February monthly amortization
  • $50.00 to make up the shortfall of the January amortization
    • Total amortization recorded in your February journal entry would be $1,000.00
• Set up the amortizable item in the Prepaid Property Tax reconciliation
• Adjust the amortization table for the City of Mayberry property tax to reflect the actual amounts recorded as amortization expense

The first step, recording the amortization in February, is done in your General Ledger with your month end journal entry process.

Setting up the amortizable item is a little bit different than usual because you are setting it up after the amortization period has started. Here's how you do it.

First - set up your amortizable item. Note the extensive explanation included in the Comments area. This will now be included in all your reconciliations for the rest of the year so you'll never again have to explain what happened in January and February.

Also note that the Open Date is in the month of February (when the actual tax bill was paid) and the Amortization Begin Date is BEFORE the Open Date. Since the Open Date is the key date used to show this item in a reconciliation you won't have to worry about the Amortization Begin Date changing a previously completed reconciliation.

Second - open the Monthly Amounts table and change the Amounts in January and February to reflect what you actually recorded in those months. January is changed to show the $900.00 that you recorded in January. February is changed to show the $1,000.00 that you actually recorded in February. The remainder of the year should be recorded at the rate of $950.00 per month.

Third - enter a close date for the Reconciling Item you created in January for the amortization you recorded prior to receiving the tax bill. This is shown here. Note the additional explanation that was entered to describe when the tax bill was paid and how the year-to-date expense amount was adjusted.

After you click on the Save & Exit button the window will close and the reconciling item will disappear from your reconciliation. Here is what your completed reconciliation will look like after you have completed these three steps.

Now you can see that the Amortizable Item is back in its normal state. The year-to-date adjustment of amortization that was made in February brings the item back into synch with where it should be. There are 10 months left in the year and the amount remaining to be amortized is $9,500.00. This would be $950.00 per month.

Also note that the explanation of what happened in receiving the tax bill late is clearly explained and will be documented throughout the year without any additional effort on your part.

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