Prepaid Property Taxes: T.I.P.P. and Journal Entries

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T.I.P.P. = Tax Instalment Payment Plan

Generally here in our province, your property taxes are probably either due June 30th or October 31st .. depending if you live in the city or in the rural country. The city or municipality often offers you the option to pay your property taxes on a monthly basis, usually by automatic withdrawal from your bank account on the first of each month. The property taxes (and business taxes) run for the calendar year .. and generally are precalculated as a fixed amount until the new taxes for the current year become in effect. Then, the payment would be altered slightly and be adjusted if necessary.

For accounting purposes, generally speaking, if your fiscal year end is December 31st .. then at the year end date there should be no prepaid business or property taxes on your balance sheet.

But what if your fiscal year end is .. July 31st? September 30th? January 31st?

In most cases .. you may not have to adjust or setup prepaid business or property taxes .. if you are on the 12 month T.I.P. Plan. But some businesses and people may be on the 10 month plan. It is in these cases that there may be a need to setup prepaid business taxes in the G/L. T.I.P.P. are convenience for payments, and may not reflect the actual expense for the period.

I thought I would look at two examples of the need to look at the prepaid expense account, even though there are T.I.P.P. payments .. because you can’t just assume that there is no requirement to setup prepaid amounts .. and “pass” on this.

For our examples .. Let’s assume ….

* 2004 Property Taxes were $18,000
* 2005 Property Taxes were $18,000
* 2006 Property Taxes are $24,000
* 2007 Property Taxes will be $24,000
* Property taxes become due June 3oth of each month.
* T.I.P.P. is based on a 10-month cycle, January to October
* T.I.P.P. for 2005 was: $1,800/month .. January 2005 to October 2005
* 2005 = (1,800 x 10 = 18,000)
* T.I.P.P. for 2006 was: $1,800/month .. January 2006 to June 2006, $3,300 July 2006 to October 2006
* 2006 = ((1,800 x 6 = 10,800) + (3,300 x 4 = 13,200) = 24,000)
* T.I.P.P. for 2007 will be: $2,400/month .. January 2007 to October 2007
* 2007 = (2,400 x 10 = 24,000)

EXAMPLE #1: Fiscal Year End August 31, 2006

Property Taxes in the G/L would be calculated to be $22,000 expense
* Sep/05 to Dec/05 >> 4/12 of the 2005 property taxes (18,000 x 4/12= 6,000)
* Jan/06 to Aug/06 >> 8/12 of the 2006 property taxes (24,000 x 8/12 = 16,000)

Prepaid Property Taxes as at August 31, 2006 would be calcluated to be $1,400 prepaid.
* Actual 2006 T.I.P.P. made = (1,800 x 6) + (3,300 x 2) = 17,400
* Calculated expense for 2006 was calculated to be 16,000

EXAMPLE #2: Fiscal Year End March 31, 2006

Property Taxes in the G/L would be calculated to be $19,500 expense
* Apr/05 to Dec/05 >> 9/12 of the 2005 property taxes (18,000 x 9/12= 13,500)
* Jan/06 to Mar/06 >> 3/12 of the 2006 property taxes (24,000 x 3/12 = 6,000)

Prepaid Property Taxes as at March 31, 2006 would be calcluated to be $-NIL-
Accrued Property Taxes Payable at March 31, 2006 would be credit ($1,500)

Sometimes it’s not as easy as taking the current calendar payments, and you must look at the expense – because this is the reason you are making adjustments to setup Prepaid amounts or setup Accrual amounts owing .. to reflect the proper expense in the general ledger. In this case ..
* 2005 actual payments Apr/05 – Oct/05 = (1,800 x 7 = 12,600)
* 2006 actual payments Jan/06 – Mar/06 = (1,800 x 3 = 5,400)
* 12600 + 5400 = 18,000 and it should be 19,500 expense so we are short $1,500 and an accrual has to be made.

(I should note that in the ‘real world’ .. setting up prepaid expense journal entries will also include the reversal of prior year’s calculations . this is just an example .. )

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