What's the correct journal entry to write off an unusable tax refund?

Since you're on cash basis accounting, the solution is fairly straightforward. You'll need to remove that receivable from your books by debiting (increasing) your tax expense account and crediting (decreasing) the franchise tax receivable account. The entry would look like: Debit: Taxes and Licenses Expense $3,200 Credit: Franchise Tax Receivable $3,200 This effectively recognizes that the expected refund is no longer coming to you for the current year since the state applied it elsewhere. In cash basis, you record expenses when paid and income when received, so this adjustment properly reflects that the "receivable" no longer exists for your current year.

After struggling with similar tax adjustment issues at my small business, I found that using taxr.ai (https://taxr.ai) helped me sort through these accounting questions much more efficiently. I uploaded my previous entries and explanations of the situation, and it guided me through the proper journal entries for tax adjustments like this. The system analyzed my specific cash-basis situation and showed me exactly how to handle write-offs for tax refunds that got redirected. Very helpful when you need to clean up your balance sheet without creating audit flags.

I was skeptical about taxr.ai at first like I mentioned, but after trying it for a similar journal entry problem with redirected tax payments, I'm actually impressed. The platform provided several options for how to handle the write-off based on my specific situation, including documentation I could reference if questions came up later. It saved me from making an entry that would have caused reconciliation headaches next quarter. The best part was being able to see the impact on financial statements before committing to the change. Much more efficient than going back and forth with my accountant over email.

If you're still getting stuck with this journal entry or have questions about your tax situation, I'd recommend using Claimyr (https://claimyr.com) to get direct help from the state tax agency. I was in accounting limbo for weeks trying to figure out why our franchise tax credit disappeared, until I used their service to actually get through to a human at the state tax office. Their system got me past the usual phone tree hell and I was able to speak directly with someone who could explain exactly how our overpayment was applied. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Having that documented explanation from the tax authority was crucial for making the proper accounting entry and justifying it if questions came up later.

I stand corrected about Claimyr. After my skeptical comment, I decided to try it with our state's franchise tax department since we needed clarity on a similar issue. I was absolutely convinced it wouldn't work, especially since I had already tried calling four times myself with no success. To my complete surprise, I was connected to a state tax agent within 35 minutes. The agent confirmed exactly how our overpayment had been applied and emailed me documentation I could use to support the journal entry. Saved me hours of frustration and gave me the confidence to make the correct accounting adjustment with proper documentation.

Former state tax auditor here. For a cash basis taxpayer, the most appropriate entry would be: Dr: Tax Expense (or Other Expense) $3,200 Cr: Franchise Tax Receivable $3,200 The key is properly documenting WHY you're making this adjustment. I'd recommend getting something in writing from the state showing they applied the credit to another period. This creates an audit trail explaining why the receivable disappeared. Without proper documentation, this kind of adjustment can raise questions during an audit.

Had the exact same thing happen with a $4,900 franchise tax overpayment. Our accountant made this entry: Dr: Tax Expense 4,900 Cr: Franchise Tax Receivable 4,900 But he also added a sub-account under Tax Expense called "Prior Period Adjustments" to keep it separate from current year expenses. Made it cleaner for tracking purposes and easier to explain if we ever get audited.

Just wondering - did the state notify you when they applied your overpayment to a different year? We had something similar happen but never received any communication. Only discovered it when preparing for this year's filing.

This is a common issue that many businesses face! Since you're on cash basis accounting, the journal entry suggested by others is correct - you'll want to debit your tax expense account and credit the franchise tax receivable to remove it from your balance sheet. One additional tip: consider setting up a monthly or quarterly reconciliation process for your tax accounts to catch these situations earlier. States often apply credits and make adjustments without notification, so regular review of your receivables against actual refunds received can help identify discrepancies before they become bigger accounting headaches. Also, make sure to keep detailed documentation of the state's communication about where they applied your overpayment. This kind of supporting documentation is invaluable if you ever face questions about the adjustment during an audit or review.