Tax Impact of NoL Carryback

[penpoint]

Hello. I do books for a small C corporation which had a NoL for T/Y 2017. It was carried back and the company received a refund of both federal and state taxes from previous years.
I created the ledger entry for the federal refund by debiting "Cash" and crediting "Income Tax Expense".
For the state refund I debited "Cash" and credited "Other Income".
The first part of the question is - is the above correct?
Secondly, how is it handled on the tax return? Am I correct in treating the state refund as income since it was previously deducted as an expense and NOT treating the federal refund as income since it was not deducted previously as expense?
Thanks for any guidance.

 

[Zigner]

Hello. I do books for a small C corporation which had a NoL for T/Y 2017. It was carried back and the company received a refund of both federal and state taxes from previous years.
I created the ledger entry for the federal refund by debiting "Cash" and crediting "Income Tax Expense".
For the state refund I debited "Cash" and credited "Other Income".
The first part of the question is - is the above correct?
Secondly, how is it handled on the tax return? Am I correct in treating the state refund as income since it was previously deducted as an expense and NOT treating the federal refund as income since it was not deducted previously as expense?
Thanks for any guidance.

Your question would be better asked in a business tax preparation forum.

 

[LdiJ]

Hello. I do books for a small C corporation which had a NoL for T/Y 2017. It was carried back and the company received a refund of both federal and state taxes from previous years.
I created the ledger entry for the federal refund by debiting "Cash" and crediting "Income Tax Expense".
For the state refund I debited "Cash" and credited "Other Income".
The first part of the question is - is the above correct?
Secondly, how is it handled on the tax return? Am I correct in treating the state refund as income since it was previously deducted as an expense and NOT treating the federal refund as income since it was not deducted previously as expense?
Thanks for any guidance.

That does not sound correct to me. It is neither an expense of the current year nor income in the 2017 or 18 year. I agree that you need to debit cash, but I think that the credits need to go into one of the owner's equity accounts or retained earnings, as they impact previous years.

 

[Taxing Matters]

Secondly, how is it handled on the tax return? Am I correct in treating the state refund as income since it was previously deducted as an expense

If the state tax paid had been deducted on the federal return and then that tax is refunded by the state later then yes, it is income to the taxpayer in the year the refund was received.

and NOT treating the federal refund as income since it was not deducted previously as expense?

A federal tax refund is never taxable income for federal income tax. You are likely correct that the federal tax refund is not taxable income for state income tax, too, though of course that depends on the applicable state tax law and you didn't mention the state.

 

[penpoint]

That does not sound correct to me. It is neither an expense of the current year nor income in the 2017 or 18 year. I agree that you need to debit cash, but I think that the credits need to go into one of the owner's equity accounts or retained earnings, as they impact previous years.

OK, thanks for the feedback. It will eventually wind up in Retained Earnings when the accounts are closed and transferred over to the Income Summary. But, I may should have just put there to begin with. Thanks.

 

[penpoint]

If the state tax paid had been deducted on the federal return and then that tax is refunded by the state later then yes, it is income to the taxpayer in the year the refund was received.



A federal tax refund is never taxable income for federal income tax. You are likely correct that the federal tax refund is not taxable income for state income tax, too, though of course that depends on the applicable state tax law and you didn't mention the state.

Thanks for the info. The state tax (Georgia) was deducted on the federal return so I will add it in to this year's Income-Other. I don't recall the state tax return having an adjustment for the federal tax paid but I will double-check to be sure. Thanks again for the help.

 

[LdiJ]

Your question would be better asked in a business tax preparation forum.

This isn't a tax question, its a bookkeeping question.

 

[Zigner]

This isn't a tax question, its a bookkeeping question.

Then the OP's question would be better answered in a bookkeeping forum, not a tax law forum.

 

[Taxing Matters]

This isn't a tax question, its a bookkeeping question.

Did you not see the tax part of the question then?

 

[penpoint]

I appreciate all the replies and certainly did not intend to start a debate. It seems to be both a bookkeeping and tax question. How to enter it into the ledger to begin with (bookkeeping) but also how to handle it on the tax return. Both are in play. I will be more discerning when choosing the proper category in the future.

The important thing is I think #TaxingMatters and #LdiJ have provided the information I needed to get me on the right path. And again, I appreciate the help.

 

[Zigner]

I appreciate all the replies and certainly did not intend to start a debate. It seems to be both a bookkeeping and tax question. How to enter it into the ledger to begin with (bookkeeping) but also how to handle it on the tax return. Both are in play. I will be more discerning when choosing the proper category in the future.

The important thing is I think #TaxingMatters and #LdiJ have provided the information I needed to get me on the right path. And again, I appreciate the help.

I suggest that you take a course in bookkeeping. That's not meant as a snarky comment, rather, it's meant to suggest that such a course will assist you in the future.

 

[penpoint]

Zigner> I have taken a course in bookkeeping. Actually, I have an Associates Degree in Accounting. This matter, however, is just a bit over the head of someone with an AS. I felt a bit wobbly on it and was simply looking for some guidance from some who are perhaps better educated and more experienced. Hopefully I will be able to continue my education and become more proficient in these things.

Again, thanks to all who were helpful.