Tax Expenses are used in a forecast when a tax needs to be added to an Expense account on the P&L. The added expense is also held in a liability account on the Balance Sheet.
Some common types of Tax Expenses include:
Corporate Income Tax
Employer payroll match contributions
Employer’s NI (UK)
Frequently asked questions about Tax Expenses:
Setting up a Tax Expense
To set up a Tax Expense in your forecast,
Go to your Fathom forecast
Click the ‘Cog/Gear’ icon in the lower left corner to open the ‘Forecast Settings’
At the top of the Forecast Settings menu, select the ‘Tax’ tab
In the ‘Tax expense accounts’ section, click the green ‘+ Add account’ option
Fill out the following fields:
The expense account on the P&L the tax will be expensed to each month.
The Balance Sheet liability account the collected tax will be accumulating in.
The accounting method you are using to recognize the collected tax.
If selected, then Fathom will pay down the entire amount in the Posting to liability account according to the payment period and tax year you specify.
💡Pro Tip: For payments that do not fit exactly within the payment period scheme, the ‘Advanced Options’ allow for more flexibility in scheduling when payments are made.
If not selected, then you can pay down the Posting to liability account through one-off or recurring journals.
Allowed: If calculated taxes are negative, then Fathom will assume that you are receiving a refund for those tax amounts. Therefore, at the end of the tax period, a refund will be issued for the negative accumulated tax amount; increasing the cash account the tax is being paid from by the same amount.
Not Allowed: If calculated taxes are negative, a refund will not be issued to the cash account the tax is being paid from. Instead, the negative balance will be carried forward to offset future positive calculated tax values.
7. Select the green ‘Add’ button to add the tax
Now create the tax formula:
Once the tax has been added, you can select ‘Add formula’ to build the formula that will calculate the tax.
The formula builder will open. You can type in the name of an account, heading, or metric (such as Earnings Before Tax) to include it as a variable in your formula.
Save the changes for the formula once you’ve finished building it.
💡Pro Tip: The ‘Posting to’ liability account will automatically be paid down by your default cash account. If you want the amount to be paid by a different account, then you can select the option to ‘Edit’ the tax and choose a different ‘Paid from’ account.
❗ Note: If the 'Auto-adjust tax liability' option is checked, Fathom will apply the tax formula you have created backwards into your actuals until the selected date. The calculated results are then posted as adjustments to the actuals in 'Step 1 - Update Data'. For more information on the auto-adjustments, please see the 'Auto Adjustments for Income Tax' article.
How a tax expense impacts your forecast
When you create a Tax Expense in Fathom, the tax amount is added as an Expense on your Profit & Loss. As the expense is a non-cash expense until the tax is paid, the tax amount is considered a liability until the tax is paid.
The amount in the Tax Liability account, or posting to account, will increase month over month while the tax expense is incurred and remains unpaid by the Cash account. You can use journals to pay down this Tax Liability amount or you can select to automate payments according to a monthly, quarterly, annually, bi-annually, or bi-monthly basis.
Example: A company forecasts $100,000 in Earnings Before Interest & Tax, or EBIT, in a month. The tax expense formula calculates the company’s income tax as 30% of EBIT or $30,000.
In the forecast, $30,000 would be listed in the Tax Expense account on the Profit & Loss. On the forecast’s Balance Sheet, the Current Earnings for the period would decrease by $30,000 to account for the new expense. At this point, the Cash account would not be impacted as the Tax Expense is a non-cash expense until the tax is paid. The $30,000 remaining in Cash for paying the company’s income tax is offset by the liability account the tax is posting to. Therefore, the tax liability account increases by $30,000.
For a quarterly payment scheme, the tax amount will accrue in the Cash and Tax Liability accounts each month until the end of the quarter. At this point, the entire amount in the Tax Liability account will be paid down by the matching Cash amount.
Why is my tax negative?
The tax expense is calculated according to the formula created for that tax type. If the formula calculates a tax amount as negative, then the tax amount will be negative.
Example: A company’s Corporate Income Tax (CIT) is calculated as 40% of the company’s Earnings Before Interest & Taxes (EBIT) according to the formula they built for the tax. The company has recently experienced a downturn in sales and EBIT for the last three months is listed as the following:
Tax formula: Corporate Income Tax = EBIT x 40%
The company pays the Corporate Income Tax at the end of each quarter. At the end of Quarter 1, the tax liability account totals -$22,000. Because Gross Profit has been negative, the Cash account has been impacted similarly.
If Cash Refunds are allowed for the company, then Fathom will assume that the company will receive a tax refund in the amount of the Tax Liability account. The Tax Liability account will return to $0 and $22,000 will be added to the Cash account (the account the tax is being paid from) to ensure the Balance Sheet balances.
If Cash Refunds are not allowed then the Tax Liability account will not return to $0 at the end of the quarter. Instead, the negative amount will be carried forward on the Balance Sheet and the Cash account will not be increased. This will allow the negative Tax Liability to offset any future Corporate Income Tax liabilities resulting from positive earnings.
What if my tax rate changes?
If the formula calculating the tax or the payment scheme needs to be changed, then you can add a New Variation of a tax into your forecast. To do this,
Go to the ‘Forecast Settings’ by clicking the ‘Cog/Gear’ icon in the lower left corner of your forecast
Select ‘Tax’ up at the top of the settings
Go to the changing tax and click the ‘Three dot’ icon next to the ‘Edit’ option
From the drop down menu, choose ‘New variation’
Select the month the tax will change
Build the new formula and/or change the payment scheme
These changes will automatically be incorporated into your forecast