How to Record a Non-Taxable Income in QuickBooks Desktop & Online?

Recording Non-Taxable Income in QuickBooks is important for businesses. QuickBooks provides a specific field for non-taxable income, making it easy to track different sources of income without affecting their taxable income.

Items marked as “non-taxable” by IRS are:

• Child support payments
• Inheritances, gifts, and bequests
• Alimony payments (for divorce decrees finalized after 2018)
• Cash rebates on items you purchase from a retailer, manufacturer, or dealer
• Most healthcare benefits
• Welfare payments
• Money that is reimbursed from qualifying adoptions

When non-taxable revenue is recorded correctly, it ensures that accounting rules and tax laws are followed and the financial statements truthfully represent the company’s financial status.

How do you record non-taxable income in QuickBooks Desktop?

Record non-taxable income in QuickBooks Desktop, create a new income account, categorize the income as non-taxable, and then enter the payment details under this account.

Following the step-by-step information below:

Part 1: Setting Up Non-Taxable Income Account

To set up a non-taxable income account in QuickBooks Desktop, go to Lists > Chart of Accounts, create a new Income account, name it “Non-Taxable Income,” and save.

Step 1: Navigate to the Chart of Accounts

1. Go to the Lists menu at the top.
2. Choose Chart of Accounts from the drop-down menu.

Step 2: Create a New Account

1. In the Chart of Accounts window, go on to the Account button at the bottom left.
2. Choose New to create a new account.

Step 3: Set Account Type

1. In the Add New Account window, choose Income as the account type.
2. Click Continue to proceed.

Step 4: Enter Account Details

1. Name the account something like “Non-Taxable Income” for easy identification.
2. Add a description if needed.
3. Click on Save & Close to create the account.

Part 2: Recording Non-Taxable Income Transactions

To record non-taxable income, go to Customers > Create Sales Receipts. Choose or create a customer, select “Non-Taxable Income” from the account list, enter the amount, and click Save & Close.

Step 1: Open the Create Sales Receipts Window

1. Click on the Customers menu at the top.
2. Choose Create Sales Receipts from the drop-down menu.

Step 2: Enter Customer Information

1. Choose the customer from whom the non-taxable Income is received or create a new customer.
2. Enter the customer details.

Step 3: Select the Non-Taxable Income Account

1. In the Item column, click on Add New.
2. Select Service as the item type and click Continue.
3. Name the item.
4. In the Account drop-down, choose the “Non-Taxable Income” account you created.
5. Click on OK to save the item.

Step 4: Enter Transaction Details

1. Put the amount received as non-taxable Income in the Amount column.
2. Add any additional details.

Step 5: Save the Transaction

1. Verify all the information entered is correct.
2. Click on Save & Close to record the transaction.

Part 3: Reviewing and Reporting Non-Taxable Income

To review non-taxable income, generate a Profit & Loss report from Reports > Company & Financial. Customize the date range, ensure “Non-Taxable Income” is included, then review, save, or print the report.

Step 1: Generate a Profit & Loss Report

1. Click on the Reports menu at the top.
2. Choose Company & Financial and then Profit & Loss Standard.

Step 2: Customize the Report

1. Select the date range for the period you want to review.
2. Click Customize Report to adjust the settings if needed.
3. Ensure that the “Non-Taxable Income” account is included in the Report.

Step 3: Review the Report

1. Click OK to generate the Report.
2. Review the Report to ensure that the non-taxable Income is correctly recorded and displayed.

Step 4: Save or Print the Report

1. To save, click the Excel button to export the Report to Excel.
2. To print, click the Print button.

How do you record non-taxable income in QuickBooks Online?

Processing invoices as non-taxable income

When you send an invoice to a customer, it is considered income because you know that it is earned revenue. This principle dictates that income is recognized when earned, not necessarily when received. To ensure the invoice is not taxable, you can exempt the item/product or service, and the tenant should also be exempted.

After recording the non-taxable income, the next step is to create a bank deposit that affects Accounts Receivable. This deposit allows you to apply the invoice. Then, you can match the bank feeds in the deposit you created, giving you full control over your financial transactions.

Part 1: Setup the Undeposited Fund account

You must enter all the transactions that you want to deposit in the undeposited funds account. This account has everything you need before you record a deposit.

Step 1: Go to chart of accounts and set asset account

1. Click on Chart of Accounts.
2. Click on New.
3. Click on Assets.
4. Choose the Other Current Assets option on the screen.

Step 2: Name the account

1. Drag down the Tax Form section and choose the Undeposited Funds option.
2. Enter the account name.
3. Click on Save.

Part 2: Access your Transactions from banks and credit cards

Download and categorize transactions by date or service. Click +New, select Receive Payment, choose the customer, check the invoice, and deposit to Undeposited Funds. Review details and click Save and Close or Save and New.

Step 1: Categorize the downloaded transaction

1. Make sure to have all the downloaded transactions from banks and credit cards.
2. Categorize the transactions based on dates or items/services.

Step 2: Add transactions to the Undeposited Funds account

1. Click on +New on the screen.
2. Choose to receive payment.
3. Choose the Customer from the Customer’s drop-down menu.
4. Select the checkbox for the invoice for which you’re receiving payments.
5. Choose Undeposited Funds from the Deposit drop down.

Step 3: Review the transaction

1. Enter the required information on the screen.
2. Select Save and send/ save and close or save and new.

Part 3: Combine the transactions

To combine transactions, click + New, select Bank Deposit, choose the deposit account, check each transaction, ensure the total matches your deposit slip, then click Save and Close or Save and New.

Step 1: Enter the transaction

1. Click on + New and select Bank Deposit.
2. Select the account you want to deposit the money into from the Account drop-down menu, 
3. Click on the checkbox for each transaction you want to combine.

Note: Make sure the total of the selected transactions matches your deposit slip. Use your deposit slip as a reference.

Step 2: Save the transaction

1. Once you are satisfied, Click on Save and close or Save and new.

Creating a Non-Taxable Sales report

Part 1: Customize data as per taxable sales detail

To customize taxable sales data, click on Reports, select Taxable Sales Detail, then choose Customize. Adjust the date range in the General drop down to refine the report.

Step 1: Access Taxable Sales option

1. Click on Reports. 
2. In the search field, key in and select Taxable Sales Detail.

Step 2: Customize the data

1. Choose the Customize option on the screen
2. Choose the date range in the General drop down.

Part 2: Create sales report 

Create a sales report, use the Filter option to select non-taxable sales and set Distribution Account to “All Income/Expense Accounts.” Review the report and click “Run Report” to finalize.

Step 1: Access the Filter option

1. Select the check boxes from the filter drop down option.
2. List all customers with non-taxable sales.
3. In the Distribution Account, select “All Income/Expense Accounts” from the drop down to hide the A/R Source line on the report.
4. In the Product/Service Taxable, select “Non-Taxable” from the drop down to show the report as Taxable Sales Detail when you run the Non-Taxable Sales Report.

Step 2: Review the report

1. Thoroughly check the report.
2. Once you are satisfied, click on Run Report.

How to change the taxable items into non-taxable items?

To change taxable items to non-taxable in QuickBooks Online, go to Sales > Products and Services, edit each item, select “Non-taxable” under “Edit sales tax,” and click Done.

Steps to change the taxable items into non-taxable items

1. Click on the Sales menu and choose Product and Services. 
2. Double-click on every taxable item you want to change to non-taxable, then click on Edit sales tax.
3. Now, click on “Still don’t see what you’re looking for?” then scroll down a bit and select Non-taxable.
4. Then, click on Done.

Conclusion

Non-taxable income must be entered into QuickBooks to maintain accurate financial records and guarantee compliance with accounting standards. By classifying these transactions accurately, businesses can make better judgements and better grasp their financial health.

Effectively handling non-taxable income in QuickBooks facilitates financial management and strategic planning in addition to streamlining accounting procedures, all of which support the general expansion and success of the company.

Frequently Asked Questions

How can I view non-taxable income on a report in QuickBooks Desktop?

To review non-taxable income in QuickBooks Desktop, generate a Profit & Loss report by going to Reports > Company & Financial > Profit & Loss Standard. Customize the report to include the “Non-Taxable Income” account and select the appropriate date range. Review and save or print the report as needed.

What is Non Taxable Income in QuickBooks?

Non-taxable income in QuickBooks refers to earnings that are not subject to income tax, such as child support, gifts, or certain benefits. It’s crucial to categorize these correctly to ensure accurate financial records and compliance with tax regulations.

Why is it important to accurately record non-taxable income in QuickBooks?

Accurate recording of non-taxable income ensures compliance with accounting standards and tax laws. It helps maintain precise financial records, supports informed decision-making, and reflects the true financial status of the company.