Tax examples

Learn about revenue recognition with tax examples.

Unless stated otherwise, these tax examples recognize revenue in whole-day increments, which matches the default amortization granularity in your settings. You can change that setting to recognize revenue by the second or by the month.

Tax exempt

Your customers can have a tax exemption status of either exempt or reverse. No tax is calculated on the invoice in either case.

In this example, a customer with a tax exemption status of reverse starts a monthly subscription on January 1 at 00:00:00 UTC. It costs 31 USD per month and has a tax-inclusive rate of 10%. Because the customer is tax exempt, the total amount due is 27.90 USD. The subscription generates an invoice, the invoice finalizes, and the customer pays the invoice on the same day. Your journal entry would look like this:

Tax-inclusive rate on invoice items

An invoice item can include a tax-inclusive rate. When you add an invoice item to an invoice, it can use the same accounting period or a different accounting period from its creation date.

Same accounting period

In this example, a customer starts a service for a period of 1 month on January 1 at 00:00:00 UTC. The total amount due is 34.10 USD and has a tax-inclusive rate of 10%. You add the invoice item to an invoice on January 1, the invoice finalizes, and the customer pays the invoice on the same day. Your journal entry would look like this:

Different accounting period

In this example, a customer starts a service for a 3 month period on January 1 at 00:00:00 UTC. The total amount due is 100.00 USD and has a tax-inclusive rate of 10%. You add the invoice item to an invoice on March 1, the invoice finalizes, and the customer pays the invoice on the same day. Your journal entry would look like this:

Tax liability

Invoices and invoice line items can be assigned tax rates. When tax rates are assigned, the Revenue Recognition reports can compute tax liability.

Below is an example using an exclusive tax rate with the following assumptions:

• On January 1, at 00:00:00 UTC, a customer starts a monthly subscription that costs 31 USD with an exclusive tax rate of 10%. The total due amount is 34.10 USD.
• The subscription generates an invoice.
• The invoice finalizes and is paid on the same day.

Below is an example using an inclusive tax rate with the following assumptions:

• On January 1, at 00:00:00 UTC, a customer starts a monthly subscription that costs 31 USD with an inclusive tax rate of 10%. The total due amount is 31 USD.
• The subscription generates an invoice.
• The invoice finalizes and is paid on the same day.