Downpayment Process to Cover Tax Amount of an Invoice

ConnectWise has suggested a downpayment process to tax the downpayment invoice then use the "Downpayment was previously taxed" tickbox. However, the problem is the tax that is not deferred, so it would actually be remitting tax on income that has yet to be earned.

Disclaimer: This is not accounting advice, check with your CPA. 

We here at Wise-Sync made our own process to ensure that the tax will be covered once downpayment has been applied to an agreement or standard invoice.

Here's how we do it:

  1. We create a Downpayment invoice for the full amount including tax, but the amount is the total amount including Tax (but included in the amount, not as a Tax Amount). This is a forward payment for the supply of goods and services, which is not yet the taxable supply. On the invoice, we note that this is not the taxable supply, and a final invoice will be issued on completion or supply of the taxable goods.

    Product on Downpayment
    Amount = $1166.00

    Downpayment Totals and Options.
    Note: This is not Taxed.

    This is raising the Liability Account (downpayment) revenue, by the total amount expected to invoice. At this stage, this is just a "Bunch of Money"

    Invoice in Xero:

  2. When we invoice, we ensure that the downpayment amount is the total amount being paid. This forces the invoice into a "Negative" but covers the tax, allowing the tax to be correctly reported, and booked into the month.

    Invoiced Amount: $1000
    Downpayment Applied ($1100)
    Tax: $100
    Total: $0

    When it syncs, it looks odd, but it is actually correctly applying the tax based on your tax settings (where parts are taxable or not). The trick is to ensure that when you generate the invoice, you need to check the box to "Override Downpayment Amount" as the down-payment by default will only cover the amount ($1000) not the $1100 which is the total being paid.

    Here's a live example:

    For reference, this client has multiple downpayment invoices, as they had "Extended Consulting" services. So they added more time to their existing onboarding project

    Liability Account: $2288.00 (amount of cash in the bank)
    Invoice issued for Taxable Services ($1325) + 10% Tax)

    a. The amount being billed on the invoice
    b. "Override Down payment checked"
    c. Invoice is Negative (but covers sales tax)
    4. Total is $0

    When it syncs to Xero:

    The tax is correctly defined (in our case 10%) and becomes a "Tax Event" on the issue of the final invoice.
    The operation of the invoice then brings the $1457.50 down from the liability account, and posts the following to your P&L

    Income: 1325.00
    Tax: 132.50

    Balance of the Cash in the Liability Account:

    Downpayment(s): $2288.00
    Invoice: ($1457.50)
    Balance: $830.50

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