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Business Tax Tip: Recording Sales Tax Incorrectly May Increase Your Income Tax

Working on growing your business is important. However, working to improve your business is also important. One aspect that many businesses (whether established, startup, big or small) allocate little resources is the accounting and finance function.

Not understanding the financial or accounting data, your company has may cost you money.

Many businesses neglect their accounting and incorrectly show sales tax collected from customers as part of sales revenue.

For example: $100,000 sales with $9,000 sales tax collected is reported as $109,000 sales and $9,000 sales tax expense when paid. This should be reported as $100,000 sales and a $9,000 liability for the sales tax collected that will be remitted to the tax authorities.

Although the net income is still $100,000, here are 3 reasons why the correct accounting should be used:

1.      By including sales tax in revenue, your overstated revenue may create additional tax for your business. Many states and cities impose business taxes based on your gross revenue rather than net income. For example, California LLCs are subject to a gross receipts tax.

 2.      By including sales tax in revenue, your overstated revenue may limit special tax rules for small businesses. For example, certain businesses with under $25 million revenue can take advantage of the cash accounting method.

 3.      Overreporting your sales, may distort your state taxes as some states tax your business based on the ratio of property, payroll and sales within the state. Some states tax your business solely on the ratio of sales within the state to worldwide sales.


Have more questions on how your accounting impacts your taxes, contact Richard Pon, CPA for a consultation.

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Richard Pon CPA, CFP