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Why is the Invoice Displaying an Incorrect Tax-Owing Amount?

Question:

  • When a line item is chosen with no tax applied to it, but the other line items have the tax applied, the taxed amount seems to be calculated incorrectly.

Environment:

  • Clio Manage

Additional Information:

  • N/A

Answer:

Tax is calculated on the total amount (time*rate) of the line items that have tax selected to be applied individually to them. That is, tax is not calculated based on the 'Sub-total' showing on the bill, but rather on the sub-total of the line items that have tax applied to them.

Applying discounts to the invoice can also affect this as discounts applied to an invoice are applied proportionally to all line items on a bill, including expenses.

Example 1: A bill with non-taxable line items 

Edit_invoice__1971___Clio_2021-04-08_11-24-13.png_2021-04-20_17-01-30.png

In the invoice above, the sub-total showing on the bill is 2070.

However, as highlighted in the image, tax is only applied to 5 of the line items (Excludes the $12.50 line item. The taxable amount therefore, is $2,057.50  [ie, 2070-12.50],and not $ 2070.00

Seeing the sub-total of 2070 on the invoice (see below), and the tax-rate of 13% under it, might lead the reader to assume the taxed amount should then be (13% of $2070 = $269.1), which is not the case, as the taxable amount is $2,057.50, and the taxed amount is therefore (13% 2057.50 = $267.48)

Invoice__1971___Clio_2021-04-08_11-23-14.png_2021-04-20_17-05-24.png

 

Example 2: A bill with non-taxable line items and a discount applied to the invoice

In the example below, tax is applied to the services only, and a discount has been applied to the bill. All line items will receive a potion of this discount, including the expenses.

discountbilltax.png

The calculation $10,500 Subtotal - $2000 Discount - $500 Expenses = $8000 taxable amount is incorrect since it does not account for the discount applied to the expenses, and assumes the full discount was applied to the services.

This calculation should be $10,500 Subtotal - $2000 Discount - $404.80 Expenses = $8095.20 taxable amount.

To get this, we must first calculate the % of the line items to distribute the discount. In this case, the Expenses are 4.76% of the bill (500 / 10,500). 4.76% of the $2000 discount is $95.20, which means a $95.20 discount is applied to expenses and a $1904.80 discount is applied to the services.

After the discount, the services sub total is $8095.20, which is the taxable amount and results in $404.76 of tax.

To avoid having the discount being applied to expenses, apply line item discounts to the services instead of using an invoice discount.

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