How to enter a tax credit/deduction/exemption in double entry system?

Question

I started using GnuCash and have learned the basics of double entry bookkeeping for managing rental income. I have managed to create a working Chart of Accounts that works well and accurately (includes concepts like depreciation and withholding tax etc)
The only thing I haven't been able to do is: the tax authority where I live gives a tax deduction/relief/allowance/exemption of $1,000. How do I record this in a double-entry method? I thought I could record it as Expenses:Deduction since it will be used to offset the taxable income but what about the second entry? Where does that go? I tried Liabilities:Tax but something seems incorrect since if I record an expense in Expenses:Deduction, my  Liabilities:Tax also increases instead of going down. Any ideas?

Grade 'Eh' Bacon · Answer

You are entering it as an 'expense', because intuitively it is a deduction-esque thing on your tax return. However, you are conflating two concepts:
Your GNUcash reports are recording accounting income. Your tax return records taxable income. It is like a 2nd set of books. This is normal, because tax authorities often require things to be reported differently than regular accounting standards. As an example - your allowed amount of amortization for tax purposes would be based on tax depreciation tables, but for accounting purposes you might decide to amortize over a different period of time. For this reason, there might be a mismatch in your accounting income vs your taxable income in a given year.
So for accounting purposes, getting any sort of a tax payable reduction would be recorded as
Dr. Tax Payable [because the AP owed to IRS or whomever goes down]; and

Cr Tax Expense [because your tax expense has been reduced]

How to enter a tax credit/deduction/exemption in double entry system?

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