Accounting for real estate property taxes

[Michael Periu]

Good evening! These forums are great. I'm writing to ask about best practices or common approaches to accounting for property taxes.

Here the tax bill comes out in November of each year. If you pay in November you get a 4% discount. You have until March of the following year to pay.  The tax bill that comes out in November is actually for that calendar year. So the November 2021 bill is for January 2021 through December 2021. 

How do you handle the accounting for this?

So let's take 2022. For January through October I will be accruing this expense even though I won't pay it until November. Therefore it would show up as a property tax expense on my monthly financials. I would debit tax expense (increase an expense) and credit property tax payable (increase a liability). 

When I pay in November, I would credit cash (decrease an asset) for the first 10 months of taxes and debit property tax payable (decrease a liability) for the full amount (10 months). 

Then for 2 months of November and December I would credit cash (decrease an asset) and debit Prepaid taxes (increase an asset).

then for November and December I would debit tax expense (increase an expense) credit prepaid taxes (decrease an asset)

The 4% discount would need its own account and I would credit that account for the 4% to make up the difference between the actual bill and the cash paid.

There is one more piece. 2022. To accrue the taxes on a monthly basis I need to make a guess as to what 2022 taxes will be. Let's assume my guess was over by $1,000 (I won't know until November 2022). That means I over estimated my expenses for the previous months. Do I go back and adjust these amounts (restating my income statement) or do I just make an adjustment in November for the $1,000, basically debit property tax payable (reduce a liability) and credit WHAT? 

Thank you for helping me think through this!

[Aaron Zimmerman]

It's based on the cash basis. Whenever you pay it is when you can deduct, generally speaking unless you're on the accrual. I'd recommend sticking to cash basis if possible. 

You can accrue, but I think you'd be making it too complex/too much effort.