Taxes: Recoverable vs. Non-Recoverable

You most likely collect sales taxes from your customers and then remit the money you collected to the government tax authorities. 

You also very likely pay taxes on items you buy for your business and/or services you hire for your business.

A tax is recoverable if you can deduct the tax that you've paid from the tax that you have collected.

A tax is non-recoverable if you have to remit the full amount you've collected regardless of what you may have paid (in the same tax). 

Recoverable Taxes

Let's imagine a customer, Jane, who sells widgets. In the state where Jane does business, there's a sales tax called Tax 1 (T1). The tax rate is 5%. T1 is recoverable.

When Jane sells $100 of widgets, she charges 5% T1. In other words, she collects $5 in T1.

When Jane buys paper for the office printer for $20, she pays 5% T1, which works out to $1.

Since T1 is recoverable, when it comes time to remit the tax she's collected to the government, Jane subtracts the tax paid ($1) from the tax collected ($5) and sends the government $4. 

Non-Recoverable Taxes

Let's imagine another customer, Paula, who sells gaskets. In the state where Paula does business, there's a sales tax called Tax 2 (T2). The tax rate is 5%. T2 is non-recoverable.

When Paula sells $100 of gaskets, she charges 5% T2. In other words, she collects $5 in T2. 

When Paula buys paper for the office printer for $20, she pays 5% T2, which works out to $1. 

Since T2 is non-recoverable, when it comes time to remit the tax she's collected to the government, Paula ignores the tax that she has paid, and sends the government all the money she collected, in other words, the full $5.  

Something very important to note is that once you create a tax, you cannot change the recoverable or non-recoverable option. So, when you create the tax, be sure you know if it is recoverable or not! 

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