How to record a tax refund you received

When you receive a tax refund from the IRS or your state, you record it in QuickBooks by creating a deposit that increases your bank account and reduces your tax expense or liability account. The exact steps depend on whether you're using QuickBooks Online or QuickBooks Desktop, and whether the refund came from an overpayment you made during the year or from a prior-year return.

The core process is the same in both versions: you create a bank deposit, link it to the account where the refund landed, and assign the money to either a tax expense account (if you want to reduce what you spent on taxes that year) or a liability account (if you had recorded the tax bill as a debt you owed). Most small businesses use the expense reduction method because it directly offsets the tax payments they recorded earlier.

Key Takeaways

  • Record a tax refund as a deposit to your bank account, not as income or a negative expense.
  • Link the deposit to the same tax account where you recorded the original payment, so the two offset each other.
  • In QuickBooks Online, use the Deposit tool and select the tax account; in Desktop, use Make Deposits and choose the account from your chart of accounts.
  • If you recorded the tax bill as a liability instead of an expense, assign the refund to that liability account to reduce what you owe.
  • Keep the refund check or deposit confirmation and the IRS notice together so you can match them to the entry if you're audited.

Recording a refund in QuickBooks Online

Open QuickBooks Online and go to + New (the button in the top left). Select Deposit from the menu. Choose the bank account where the refund was deposited in the Account field at the top.

In the Payee field, type "IRS" or the name of your state tax authority. Leave the Payment method blank or select "Check" if the refund came by mail. In the Reference no. field, enter the check number or the confirmation number from your bank if it was a direct deposit.

In the Category column, click the dropdown and select the tax account where you originally recorded the payment. This is usually called "Taxes Paid" or "Federal Income Tax" or "State Income Tax" — whatever account you used when you wrote the check to the IRS or state. Enter the refund amount in the Amount column. The account will reduce by that amount, which offsets the original payment you recorded.

Click Save and Close. The refund is now recorded and your bank balance reflects the deposit.

Recording a refund in QuickBooks Desktop

Open QuickBooks Desktop and go to Banking menu, then select Make Deposits. A window will open showing your undeposited funds. If the refund has not yet been added to your bank account in QuickBooks, skip this step and go directly to Write Checks or Enter Bills — you will record it there instead.

If the refund is already showing as undeposited funds (because you entered it as a check or transfer earlier), select it and click OK. If not, click New to create a new deposit. Choose your bank account from the dropdown. In the Received From field, type "IRS" or your state tax authority.

In the Account column, select the tax account where you recorded the original payment. Enter the refund amount in the Amount column. Click Save & Close. The deposit is recorded and your bank balance updates.

What to do if you recorded the tax bill as a liability

Some businesses record estimated tax payments or year-end tax bills as a liability (money owed to the government) rather than as an expense. If you did this, you will have a liability account like "Taxes Payable" or "Federal Income Tax Payable" on your balance sheet.

When you receive the refund, record the deposit the same way as above, but in the Category or Account field, select the liability account instead of the expense account. This reduces what you owe, which is the correct treatment. Your balance sheet will show a lower liability balance after the refund is recorded.

Matching the refund to your original tax payment

After you record the refund, open the tax account you used (either the expense account or the liability account). You should see two entries: the original payment you made (a debit or increase to the account) and the refund (a credit or decrease). Together, they should show the net amount you actually paid or owed to the government.

If you made multiple tax payments during the year and received a partial refund, the account will show all the payments minus the refund. This is correct — it reflects the total tax you paid net of the refund.

Keep the IRS notice or state tax authority letter that came with the refund, along with your bank deposit confirmation. If you are ever audited, you will need to show that the refund was real and that you recorded it correctly. QuickBooks will print the deposit entry, and the IRS letter will confirm the amount.

Common mistakes to avoid

Do not record the refund as income. A tax refund is not money you earned — it is money the government is returning to you because you overpaid. Recording it as income will inflate your profit and create a tax problem next year.

Do not create a new account for the refund. Use the same account where you recorded the original payment. This way, the two entries offset each other and your tax expense or liability is accurate.

Do not forget to match the refund amount to the IRS or state notice. If the notice says you are getting $2,500 back but you record $2,000, the discrepancy will show up later. Double-check the amount before you save the entry.

Do not record the refund in the wrong bank account. If the refund was deposited into your business checking account, record it there. If it went to a savings account or a different bank, select that account in the deposit entry.

What happens if you recorded the payment but not the refund

If you recorded a tax payment in QuickBooks but the IRS or state later refunded part of it and you have not yet recorded the refund, your tax expense will be overstated. The refund entry will correct this. Once you record the deposit, your profit will be more accurate because your tax expense will be reduced by the refund amount.

If you filed an amended return and received a refund as a result, record it the same way. The refund reduces your tax expense for the year the original return was filed, not the year you filed the amendment. Check the IRS or state notice to see which tax year the refund applies to, and record it in the account for that year if you keep separate accounts by year.

Frequently Asked Questions

Should I record the refund when I file my return or when I receive the money?

Record it when you receive the money and it appears in your bank account. Until then, you do not know for certain that the refund will arrive or how much it will be. Once the deposit clears, create the entry in QuickBooks.

What if the refund is less than I expected?

Record the amount you actually received. If the IRS or state withheld part of the refund to cover a debt or penalty, the notice will explain why. Record only the amount that was deposited into your account, and keep the notice for your records.

Can I record a refund before the tax year ends?

Yes, if you received the refund before December 31 (or whenever your fiscal year ends), record it in that year. The refund reduces your tax expense for the year it applies to, regardless of when you receive it.

Do I need to create a separate account for tax refunds?

No. Use the same account where you recorded the original tax payment. This keeps your tax accounting in one place and makes it easy to see the net amount you paid.

What if I received a refund but never recorded the original payment in QuickBooks?

You still need to record the refund as a deposit to your bank account. In the category field, select a tax expense account or create one if you do not have one. The entry will show that you received money from the government, even if the original payment was not in QuickBooks.