Tax Accountant

Record and manage unusual or complex transactions

QuickBooks Online handles day-to-day business transactions smoothly, but you may occasionally encounter unique situations that require specific recording methods. Because these scenarios can have significant tax implications, we strongly recommend consulting your tax accountant or tax professional before recording them.

This guide covers how to handle several specific situations in QuickBooks Online.

Backup withholding for subcontractors

Generally, you do not withhold taxes from payments to subcontractors or independent contractors; they are responsible for paying their own taxes. The only exception is backup withholding, which occurs when the IRS notifies you that a contractor’s Tax ID Number is missing or incorrect.

If the IRS has not notified you to withhold funds, we recommend declining any voluntary request from a contractor to withhold taxes. Doing so places you between the contractor and the IRS.

If you are required to withhold backup withholding:

1. Ensure the contractor’s W-9 form indicates backup withholding or that you have received an official IRS notice (IRS Topic 307).
2. Consult your tax accountant to ensure you are compliant with current IRS rates and reporting rules.
3. When you pay the contractor, you will need to record the payment so that the net amount reflects the withholding. You may need to set up a specific liability account to track the withheld amount until you remit it to the IRS.

Recording payments to buy a competitor’s business (Goodwill)

If you pay another business owner to refer clients to you or to purchase their business operations, this is generally recorded as an asset called Goodwill.

To set up a Goodwill account:

1. Go to the Settings (gear icon).
2. Select Chart of Accounts.
3. Select New.
4. Under Account Type, select Other Assets.
5. Under Detail Type, select Goodwill.
6. Name the account (e.g., “Purchase of Competitor Business”).
7. Select Save and close.

Note: Your tax accountant may advise you to expense the entire payment immediately or amortize it over a number of years. Always follow their guidance for your specific tax situation.

Handling owner forgiveness of debt

If a business owner forgives a debt the company owes them (such as unpaid rent), the amount is generally treated as income, not retained earnings. There are specific exceptions to this rule, so please verify with your tax accountant.

To record the forgiveness of debt in QuickBooks Online:

1. Ensure the owner is listed as a Vendor.
2. Enter the unpaid bills (if they are not already in the system).
3. Create a Vendor Credit for the total amount being forgiven, using an Income account (such as “Debt Forgiveness Income”).
4. Go to Expenses > Pay Bills.
5. Select the bills affected by the forgiveness.
6. In the Credit column, apply the vendor credit you created to offset the bills.
7. Select Pay Selected Bills.

This clears the open bills and records the forgiven amount as income.

Recording donations or sponsorships

If you sell products on behalf of a local sports team or non-profit and pass the profits on to them, you need to record the disbursement correctly.

1. Go to the Settings (gear icon) and select Chart of Accounts.
2. Select New to create an Expense account (e.g., named “Sponsorships” or “Donations”).
3. When you write a check or expense the money to the team, select this new account.

Note: You should speak with a tax accountant to determine if these payments qualify as tax-deductible business expenses or sponsorships.

Managing deferred income

If you receive payment for goods or services before you deliver them, you may need to record this as Deferred Revenue (a liability). This is common in non-profits and subscription-based businesses.

While it sounds correct to categorize this as deferred income, there are specific accounting rules regarding when to recognize the revenue. We recommend consulting your tax accountant before setting this up to ensure your non-profit or business navigates the tax implications correctly.

Reconstructing bank data mid-year

If you did not connect a bank account in QuickBooks Online at the start of the year, you can enter historical data manually using your bank statements.

1. Go to the Settings (gear icon) and select Chart of Accounts.
2. Locate the bank account and select View register (or Account history).
3. Manually add deposits and withdrawals based on your monthly statements.
   • Deposits: You can batch undeposited funds to match the date of the deposit on the statement.
   • Withdrawals: Match checks, ATM withdrawals, and expenses to the corresponding receipts or bills.
4. If you carry inventory, ensure your receipts are detailed enough to enter the purchase of inventory items.
5. Match bill payments and loan/credit card payments to the existing liabilities.

Important: If you have a significant volume of transactions, manual entry can be time-consuming. Ensure your opening balance is correct as of the statement start date.

Disclaimer

Intuit and QuickBooks Online assume no responsibility for the accuracy or legality of the specific recording methods described above. Tax laws vary by location and business structure. Always consult with a qualified tax accountant or tax professional regarding your specific situation.