Record the refund as income when the IRS deposits it
When you receive a tax refund in QuickBooks Desktop, you record it as income in the bank deposit, not as a reduction to the tax expense you already recorded. This is because you paid the tax in a prior period (or the software calculated an overpayment), and the refund is money coming back to you now. The deposit itself is the transaction that matters for your books.
The method depends on whether you received the refund by direct deposit or check. In both cases, you will create a bank deposit transaction and assign it to an income account—typically a refund income account or the same tax account you originally used, depending on your accounting method and preferences.
Key Takeaways
- Record the refund as a deposit to your bank account, not as a reversal of the original tax payment.
- Create a new bank deposit in QuickBooks and assign it to a refund income account or the original tax account.
- If you received the refund by check, you may need to record a deposit to undeposited funds first, then move it to the bank.
- The refund reduces your net tax expense for the year when you file your next return, but in QuickBooks it appears as income in the period received.
Steps to record a direct deposit refund
Open QuickBooks Desktop and go to Banking > Make Deposits. Select the bank account where the refund was deposited. Click New to create a new deposit line.
In the Received From field, type a description such as "IRS Tax Refund" or "Federal Tax Refund." In the From Account field, select the account you want to credit. Most commonly this is a refund income account (if you have created one) or the same tax liability or tax expense account you used when you originally recorded the payment. Leave the Memo field blank or add a note for your records.
Enter the refund amount in the Amount column. Click Save & Close. The deposit will now appear in your bank register and your income will reflect the refund in the period it was received.
Steps to record a check refund
If the IRS mailed you a check, you have two options. The first is to record it directly as a bank deposit if you are depositing it immediately. Follow the steps above, but in the From Account field select Undeposited Funds first. This creates a holding account for the check before it clears the bank.
Once the check clears, go to Banking > Make Deposits again, select your bank account, and create a new deposit. In the deposit line, select Undeposited Funds in the Account
The second option is to skip the undeposited funds step and record the deposit directly to the bank account if you know the check has already cleared. This is faster but requires you to verify the deposit date matches your bank statement.
Choosing the right account to assign the refund
The account you choose depends on your accounting method and how you want to track refunds. If you use accrual accounting, you may have created a tax liability account when you recorded the original payment. Assigning the refund to that same account will reduce the liability and show the net tax expense for the year.
If you prefer to track refunds separately, create a dedicated Tax Refund Income account under your income accounts. This makes it easy to see refunds at a glance in your profit and loss statement. Some businesses also assign refunds to a Other Income account if the refund is small or infrequent.
If you use cash accounting, the refund is simply income in the period you receive it, so assign it to whichever income account makes sense for your reporting. Consult your accountant if you are unsure which method your business uses.
Reconcile the refund with your bank statement
After you record the deposit in QuickBooks, reconcile your bank account to make sure the refund matches your bank statement. Go to Banking > Reconcile, select your bank account, and enter the statement date and ending balance from your bank statement.
QuickBooks will show you all transactions for that period. Find the refund deposit in the list and check the box next to it to mark it as reconciled. If the refund appears on your bank statement but not in QuickBooks, you may have recorded it in the wrong account or on the wrong date. If it appears in QuickBooks but not on the statement, the check or deposit may not have cleared yet.
Once all transactions match, click Reconcile Now. Your bank account is now balanced and your refund is officially recorded in your books.
What to do if you recorded the tax payment incorrectly
If you originally recorded the tax payment to the wrong account or with the wrong amount, you have two choices. The first is to record the refund to the same wrong account, which will at least net out the error. The second is to correct the original transaction before recording the refund.
To correct the original transaction, go to Banking > Write Checks (or Make Deposits if it was a deposit) and find the original payment. Click Edit, make the correction, and save. Then record the refund as described above. This approach is cleaner for your records and makes it easier for your accountant to review.
If the original payment was recorded months ago and you are not certain of the details, ask your accountant before making changes. They may prefer you to record a correcting entry instead of editing the original transaction.
Frequently Asked Questions
Should I record the refund as a negative expense or as income?
Record it as income (a deposit), not as a negative expense. This keeps your bank account accurate and follows standard accounting practice. The refund is money coming in, not a reversal of an expense.
What if I received a state tax refund as well as a federal refund?
Record each refund as a separate deposit line in the same bank deposit, or create two separate deposits if you prefer. Assign each to the appropriate state or federal tax account so you can track them separately on your profit and loss statement.
Can I record the refund before it arrives?
No. Record the refund only after you have received it and deposited it into your bank account. Recording it early will cause your bank reconciliation to fail and your books will not match your bank statement.
Do I need to create a separate account for tax refunds?
No, but it is helpful if you receive refunds regularly. A dedicated refund income account makes it easy to see the total refunds for the year. If you only receive a refund occasionally, assigning it to the same tax account you used for the payment is simpler and works just as well.
Will recording the refund affect my tax return next year?
No. The refund is recorded in QuickBooks for bookkeeping purposes only. Your tax return is based on your actual tax liability and payments, which your accountant will calculate separately. The refund you received this year will be reported on your next tax return as income or a reduction in tax expense, depending on your situation and the tax rules that apply.