Quickbooks Adjusting Accounts Receivable: Writing Off Over Payments and Bad Debts

Quickbooks in Adjusting Accounts Receivable

If your business uses receivable accounts to track customer payments chances are you have a few customers that have over payed or refuse to pay for products or services. In either case these receivables will stay on the books unless they are cleared out. Here is how to use Quickbooks in Adjusting Accounts Receivable.

Clearing out an over payment:

We will be using an invoice to zero out over an payment in a customer’s receivable account. The over payment will be written off into an expense account. It is recommended that you create an ‘Other Expense’ account specifically for this. This way if an adjustment needs to be changed or deleted it can found easily.

If you haven’t done so already create a new ‘Other Expense’ account:

1. Begin by opening the ‘Chart of Accounts’ window. On the top menu bar click on ‘Accountant’ and select ‘Chart of Accounts’ from the drop down.
2. Right click in the window and select ‘New’ to create a new account.
3. Select ‘Other Account Types’ at the bottom of the window. In the drop down next to this option select ‘Other Expense.’
4. Click ‘Continue’ in the bottom right corner of the window.
5. Name your new account. You will use to write off the overpayments. It is recommended to use a specific name like ‘A/R Adjustments.’
6. Finally click ‘Save & Close’ at the bottom of the window to finish creating the new account.

With your expense account created, make a new invoice item. This is the item that we will use to adjust customer accounts:

1. Begin by opening the ‘Item List’ window. On the top menu bar click on ‘Customers’ and select ‘Item List’ from the drop down.
2. Right click in the window and select on ‘New’ to create a new invoice item.
3. Select ‘Other Charge’ as the item type in the ‘Type’ drop down menu.
4. Give the item a descriptive name. Something like ‘Overpayment Adjustment’ is recommended.
5. Next choose the account this item will go against in the ‘Account’ drop down. Select the account created in the previous step or the account that you would like to use.
6. Finally click ‘OK’ in the top right corner of the window to finish creating the invoice item.

Now you are ready to zero out customer over payments:

1. Before you begin write down the information for the customer account you will be adjusting and the amount you will need to debit from their receivable account.
2. Begin by opening the ‘Create Invoices’ window. On the top menu bar click ‘Customers’ and select ‘Create Invoices’ from the drop down.
3. Select the customer’s account that you will be adjusting in the top left corner of the window with the ‘Customer Job’ drop down.
4. Next under the ‘Item’ field in the invoice select the invoice item you created to make accounts receivable adjustments.
5. It is recommended that you leave a detailed description of the adjustment in the ‘Description’ or ‘Memo’ fields to avoid confusion in the future.
6. Under the ‘Amount’ field enter the adjustment amount you wrote down earlier.
7. If you need to change the date the adjustment will take effect, change the ‘Date’ field to the required date.
8. Finally click the ‘Save & Close’ button in the bottom right corner of the window to finish creating the adjustment invoice.

The customer’s Accounts Receivable should now be zeroed. It is recommended that you check the customer’s receivable account to make sure the invoice was entered correctly and had the desired effect.

Clearing out a bad debt:

If your accounting is done on a cash basis or the uncollectible invoice amounts will not significantly affect your gross sales there are two simple ways to clear out bad debts. You can either issue a discount on the bad debt in question or mark as a bad debt.

Issuing a discount for an invoice:

1. Begin by opening the ‘Customers’ window. On the top menu bar click ‘Customers’ and select ‘Customer Center’ from the drop down.
2. Find and click on the customer’s name whose receivables account needs to be adjusted.
3. Find the invoice or invoices that are outstanding and double click on one to open the ‘Create Invoices’ window.
4. Insert a new item into the invoice and select ‘Discount’ for the item type.
5. Make sure to leave a specific description to avoid confusion in the futue.
6. Enter the amount being written off in the amount field.
7. Select ‘Save & close’ to finish editing the invoice.
8. Repeat these steps for any invoices that need to be written off.

Marking the Invoice as a bad debt:

1. Begin by opening the ‘Customers’ window. On the top menu bar click ‘Customers’ and select ‘Customer Center’ from the drop down.
2. Select the customer whose receivable account needs to be adjusted.
3. Find the invoice or invoices that are outstanding and double click on one to open the ‘Create Invoices’ window.
4. When the invoice opens, on the bottom left click on the ‘More’ button and select ‘Void’.
5. A window will pop up asking you to confirm voiding the invoice. Select ‘Yes’
6. Repeat steps 4 to 6 for each invoice you need to void.

Quickbooks in adjusting accounts receivable

It is recommended that you check the customers receivable account to make sure the adjustment had the intended effect.

If your business reports on an accrual basis voiding bad debts is a bit more complicated. The invoices have already been reported as income but are no not collectible. It is recommended that you talk to your accountant to find solution.

Recapture of Section 1231 ordinary losses

A client calls and says he is selling his rental property after owning the property for a number of years. He wants to know if he will get long term capital gains treatment. The normal answer would be “yes”.

The problem is that he sold a 2nd rental property 4 years ago at a loss. This loss was treated as a ordinary loss.

Let’s look at an example,

Say the loss on the second rental property was 60,000.

Now the long term capital gain on the current home he is selling is 100,000. The IRS says the 1st 60,000 is going to be taxed as ordinary income to “recapture” the benefit of the earlier ordinary loss, and then the remaining 40,000 is eligible for the lower long term capital gain rates.

Why is there this rule. Because the Congress did not want taxpayers selling their “loss” properties in one year and taking an ordinary loss and postponing the sale of gain property til a later year to take advantage of the long term capital gain rates.

SEE IRS publication 544 https://www.irs.gov/pub/irs-pdf/p544.pdf

Your nonrecaptured section 1231 losses are
your net section 1231 losses for the previous 5
years that have not been applied against a net
section 1231 gain. Therefore, if in any of your
five preceding tax years you had section 1231
losses, a net gain for the current year from the
sale of section 1231 assets is ordinary gain to
the extent of your prior losses. These losses are
applied against your net section 1231 gain beginning
with the earliest loss in the 5-year period.

This is not the only recapture possible. The rental property is consider IRC 1250 property and the depreciation expense taken over the years was an offset to ordinary income. Gain on the disposition of section 1250 property is treated as ordinary income to the extent of “additional depreciation” allowed or allowable on the property.

Additional depreciation is the amount over and above the amount that would have been taken using straight line depreciation. Now there are exceptions to having to recapture this additional depreciation.

Most likely the rental property in our example was place in service as a rental after July 31, 1986. If the property was placed in service after July 31, 1986, then no depreciation recapture. Why? Because after July 31, 1986, the straight line method was the norm.

Keep in mind you can have recapture of depreciation on personal property (IRC 1245) sold at a gain.

Getting back to the recapture of the 1231 loss taken 4 years ago in our example, it is hard to know how the taxpayer or the IRS would remember to offset the current year long term capital gain. Thanks to computer software that keeps a record of 1231 losses.

Make sure you see your tax preparer for your particular situation.

US Citizens who own Foreign Corporations

Issues for a US Citizen who owns a

Foreign Corporation

The general rule is that shareholders do not pay tax on corporate income until the income is distributed as a dividend.

1. FOREIGN PERSONAL HOLDING COMPANY Is your foreign corporation a “personal holding company”

The foreign corporation can be both a domestic personal holding corporation and a foreign holding corporation. Test for both basically the same.

A. Test for if the corp. is a FPHC.

1. More than 50% of the stock is owned by fewer than 5 people. (FPHC does not apply if 11 s/h own equal shares =9.99% each)
AND

2. 60% of its adjusted GROSS ordinary income is from

Personal Holding Company Income

(1) Dividends, etc. Dividends, interest, royalties (other than
mineral, oil, or gas royalties or copyright royalties), and annuities.

(2) Rents The adjusted income from rents; except that such adjusted income shall not be included if—
(A) such adjusted income constitutes 50 percent or more of the adjusted ordinary gross income,
and
(B) the sum of dividends paid and deemed and consented paid > than X. X = PHCI – (10% X OGI)

For example,

PHCI is 40,000 and OGI is 30,000

Dividends have to be paid > 7,000 (40,000-33,000)

(3) Mineral, oil, and gas royalties
(4) Copyright royalties
(5) Produced film rents
(6) Use of corporate property by shareholder
(7) Personal service contracts

(A) Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (by name or by description) in the contract; and
(B) amounts received from the sale or other disposition of such a contract.
(8) Estates and trusts

2. PASSIVE FOREIGN INVESTMENT COMPANIES

The foreign corporation is PFIC if either:

A. 75% or more of its gross income is from passive income
(Dividends, Interest, Rents)

B. 50% or more of the average value of the corporate’s ASSETS during the year: 1. produce passive income

2. or held for the production-of passive income. (for example holding raw land)

The asset test is met if 50% or more of the foreign corporation’s average assets (as defined in the IR Code) produce, or could produce passive income, or are assets (such as cash and bare land) that produce no income. The test is applied based on the foreign corporation’s adjusted basis, for U.S. tax purposes, of the assets, or at the election of the particular shareholder, fair market values of the assets.

Look-thru of 25% subsidiaries: Interests in 25% or more owned foreign corporations are treated similarly to partnership interests (i.e., looked through) for the income test and the asset test.

NOT PFIC income

1. Rents from an active business

2. Banking income

3. Dividends or interest received from a related person
Incorporated in the same country as PFIC

Can be subject to these rules even if you own just one share.

Indirect shareholder of a PFIC must report. Generally, a U.S. person is an indirect shareholder of a PFIC if it is:

A 50%-or-more shareholder of a foreign corporation that is not a PFIC and that directly or indirectly owns stock of a PFIC,

A shareholder of a PFIC where the PFIC itself is a shareholder of another PFIC,

A 50%-or-more shareholder of a domestic corporation where the domestic corporation owns a section 1291 fund, or

A direct or indirect owner of a pass-through entity where the pass-through entity itself is a direct or indirect shareholder of a PFIC. For more information on determining whether a U.S. person is an indirect shareholder, see Temporary Regulations section 1.1291-1T(b)(8) and Notice 2014-28.

For purposes of these rules, a pass-through entity is a partnership, S Corporation, trust, or estate.

NO DEEMED DISTRIBUTION

But when distributions are made taxed at highest rate + interest.

Can avoid by making election to include % of income even though not distributed.

A taxpayer may avoid the regime by purging the PFIC taint by a deemed sale election, a deemed dividend election, or by means of two alternative elections: (1) the qualified electing fund (QEF) or (2) the mark-to-market election. If a QEF election is made, a taxpayer usually includes in income each year its pro rata share of the PFIC’s ordinary earnings and its pro rata share of the PFIC’s net capital gain. Taxpayers holding marketable PFIC stock may make the mark-to-market election to include annually in gross income the excess of the fair market value over the PFIC stock’s adjusted basis

3. CONTROLLED FOREIGN CORPORATION DEEMED DISTRIBUTION

I Ownership Test.

A. 10% rule Must have one US shareholder who owns 10% of voting power

(CFC does not apply if 11 US shareholders own equal shares =9.99% each)

Is John Smith a shareholder in any corporation where a US shareholder has 10% interest.

And voting means can the 10% or more s/h elect in 10% or more of the Board of Directors.

10% count includes shares owned by family members, TRUST, stock thru intermediate corporations

John Smith owns 50% of F1 and F1 owns 30% of F2, John Smith is deemed to own 15% of F2.

AND

B. More than 50% of corp owned by US Shareholders.

II. Type of Income Test,

If CFC does the CFC have Income that is a problem

1. Foreign Personal Holding Company Income

2. Foreign Base Company Sales Income

US corp sets up overseas corp F that buys and sells to customers around world to take advantage of low tax rates for corp F.

3. Foreign Base Service Income

F Corp provides services for a related person (US parent for example) And services not perform in the country where F is located.

4. Foreign Base Shipping Income

5. Foreign Base Oil Income

We will ignore 2,3, 4, and 5.

Remember No “Deemed Distribution if CFC has no earning and profits.”

Additional RULE

If the CFC has passive assets = 25% of total assets, then
DEEMED DIVIDEND for excess passive assets.

GOOD NEWS only “US Shareholder” – 10% voting has “Deemed Distribution”

See your tax advisor before using this Memorandum.

Elections for 1st Year Real Estate Projects

ELECTIONS FOR 1st YEAR REAL ESTATE PROJECTS

When preparing the initial tax return here are the elections for 1st year real estate projects to consider.

1. Accrual of real estate taxes IRC 461(c) with the election included the following information as required by 1.461-1(c)(3)(i)

2. Start up expenses IRC 195(b)

3. IRC 709 Amortization of Organizational Expenditures.

4. De Minimis Safe Harbor Election 1.263(a)-1(f)

For the average taxpayer the amount of an item than can be expensed rather than capitalized is $2,500 1.263(a)-1(ii)(D).
An average taxpayer here is one who does not have audited financial statements.

If you use the de minimis safe harbor, do you have to capitalize all expenses that exceed the $2,500?

No. Amounts paid for the acquisition or production of tangible property that exceed the safe harbor limitations aren’t subject to the de minimis safe harbor election. Therefore, the safe harbor doesn’t require you to capitalize all amounts paid for tangible property in excess of the applicable limitation. If an amount doesn’t qualify under the de minimis safe harbor, you should treat the amount under the normal rules that apply, i.e., currently deductible if paid for incidental materials and supplies or for repair and maintenance. This treatment is proper regardless of whether the amount exceeds the applicable de minimis safe harbor limitation. The de minimis safe harbor is simply an administrative convenience that generally allows you to elect to deduct small-dollar expenditures for the acquisition or production of property that otherwise must be capitalized under the general rules.

5. Amounts paid to improve tangible property – Election to Capitalize Repair and Maintenance Costs. 1.263(a)-3(n)

A taxpayer may elect to treat amounts paid during the taxable year for repair and maintenance (as defined under § 1.162-4) to tangible property as amounts paid to improve that property under this section and as an asset subject to the allowance for depreciation if the taxpayer incurs these amounts in carrying on the taxpayer’s trade or business and if the taxpayer treats these amounts as capital expenditures on its books and records regularly used in computing income (“books and records”)

6. Adoption of the method of accounting recurring time exception for accrual basis tax payer. 1.461-5(d)(1)

The election to adopt the as part of the method of accounting for the first taxable year in which that type of item is incurred.

Generally an accrual taxpayer can take a deduction in the taxable year in which all the event has occurred.

A. All events test,

All events have occurred that determine the fact of there being a liability.

The liability can be determined reasonably accurately.

B. Economic performance has occurred.

The Exception is to meeting B. – the economic performance
is granted IF

1. The economic performance does finally occur within 8 and ½ months of the year end.

2. The liability is recurring in nature.

And

The amount of the liability is not material

The accrual in the present tax period is a
“better match” with the related income for the
present period than when economic performance
actually occurs.

SUBSEQUENT YEAR ELECTIONS NEEDED TO BE MADE EACH YEAR

1. De Minimis Safe Harbor Election 1.263(a)-1(f)(5)

A taxpayer makes the election by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which these amounts are paid. Sections 301.9100-1 through 301.9100-3 of this chapter provide the rules governing extensions of the time to make regulatory elections. The statement must be titled “Section 1.263(a)-1(f) de minimissafe harbor election” and include the taxpayer’s name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimissafe harbor election under § 1.263(a)-1(f).

2. Election to capitalize repair and maintenance costs – 1.263(a)-3(n)

n(2)Time and manner of election. A taxpayer makes this election under this paragraph (n) by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which the taxpayer pays amounts described under paragraph (n)(1) of this paragraph. Sections 301.9100-1 through 301.9100-3 of this chapter provide the rules governing extensions of the time to make regulatory elections. The statement must be titled “Section 1.263(a)-3(n) Election” and include the taxpayer’s name, address, taxpayeridentification number, and a statement that the taxpayer is making the election to capitalize repair and maintenance costs under § 1.263(a)-3(n).

3. Amounts paid to improve tangible property -. 1.263(a)-3

(h)Safe harbor for small taxpayers –

(1)In general. A qualifying taxpayer (as defined in paragraph (h)(3) of this section) may elect to not apply paragraph (d) or paragraph (f) of this section to an eligible building property (as defined in paragraph (h)(4) of this section) if the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the eligible buildingproperty does not exceed the lesser of –

(i) 2 percent of the unadjusted basis (as defined under paragraph (h)(5) of this section) of the eligible building property; or

(ii) $10,000.

So if the item is lessor than 2% of the building basis or 10,000 the taxpayer can expenses under the Safe Harbor.

For example if you have a rental property with a unadjusted basis of 400,000 then 2% would be 8,000 and that would be your cut off to aggregate amount that could be expensed.

Time and manner of election. A taxpayer makes the election described in paragraph (h)(1) of this section by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which amounts are paid for repairs, maintenance, improvements, and similar activities performed on the eligible buildingproperty providing that such amounts qualify under the safe harbor provided in paragraph (h)(1) of this section.

SAFE HARBORS

1. For those of you who have a retail establishment or a restaurant and are wondering if your remodeling cost should be capitalized or expensed. The IRS offers a SAFE HARBOR of taking all of the costs of remodeling and allocating 75% to repairs and 25% to Capital improvement. Rev. Proc. 2015-56.

The incredible part is that you have to have an audited financial statement. However the audit fee could be well worth the cost to be able to write of 75% of the remodeling costs.

Late S Corporation election for year 2016

Do you need to make a late election for your C corporation to be a S Corporation for 2016?

1. Fill out the 2553.

2. Sign and date the 2553 and the following example. Make sure you see a qualified tax preparer to make sure the following form is sufficient for your situation.

3. Mail to the IRS Service Center: either Cincinnati OH or Ogden UT. I would suggest sending certified mail.

4. The IRS should send you notification one way or another is accepted or rejected.

EXAMPLE

ABC Inc.
Late S Corporation Election
2016
47-5411111

IRB 2013-36

Section 4 .03 General Procedures

1. Properly filled out form 2553 with “Filed Pursuant to Rev. Proc. 2013-30″ written across the top of the Form.

2. Statement of Reasonable Cause/ Inadvertent Statement

The Taxpayer’s failure to file Form 2553 timely was inadvertent; due to a miscommunication regarding the filing deadlines. As soon as the Taxpayer discovered that the 2553 was not filed, the Taxpayer file this 2553.

Under penalties of perjury, I declare that I have examined this election, including accompanying documents, and, to the best of my knowledge and belief, the election contains all the relevant facts relating to the election, and such facts are true, correct, and complete.

___________ ___________________
Date Carol Smith
President ABC Inc.

Section 5 .02 Supplemental materials

3. Shareholder Statement of Consistent Treatment

As the sole 100% shareholder from the Effective date of the election, January 1, 2016, through today I have and will on subsequent tax returns, 1040s, report my income consistent with the S corporation status.

__________ _____________________
Date Carol Smith
Sole Shareholder