How to record a vendor refund or credit memo in your rental books
A refund from a vendor reduces the expense it came from; it is not rental income. Book it back to the same expense account as the original bill, on the day the money arrives. A credit memo (a credit toward a future bill) is recorded the same way, but the other side of the entry is what the vendor now owes you, not cash.
A refund: money comes back to your bank
You paid a contractor $1,200 to replace a water heater. The unit was later sold with a different heater, or the job was done wrong, and the contractor sends back $400. The bank feed shows $400 coming in. If you code it to rental income, your income is overstated by $400 and your repair expense is overstated by $400 too.
The correct entry puts it back against the expense: debit Checking $400, credit Repairs $400. The expense for that job is then $800, which is what the job really cost.
Example made-up numbers. Repairs for the year before the refund are $5,000. After booking a $400 refund, repairs are $4,600 ($5,000 less $400). Rental income is unchanged.
A credit memo: no cash yet
Sometimes the vendor does not refund cash. They issue a credit memo you can use on the next bill. Treat it as money the vendor owes you. Debit a vendor credits account (an asset) and credit the expense. When the next bill arrives and the credit is applied, debit the expense, credit the vendor credits account for the part you used, and pay only the remainder.
Example a $250 credit memo and then a $600 bill. You pay $350 ($600 less $250). Expenses show the full $600 for the new job and a $250 reduction from the old one, which is $350 in total.
Never net the credit against the new bill without recording it. The bank will show only $350, and unless the credit is on the books, you will not be able to reconcile.
What if the refund comes in a different year?
If the refund arrives in the same tax year as the expense, you simply deduct less. If it arrives in a later year, the rule is different. IRS Publication 525 explains that a recovery of an amount you deducted in an earlier year may need to be reported as income in the year you receive it, to the extent the earlier deduction reduced your tax. That is called the tax benefit rule.
Do not guess. Tell your preparer about any refund of an expense from a previous year. The books should show the date the refund was received and which bill it relates to, so the preparer can decide.
Refunds that are not vendor refunds
- An insurance payout for damage is not a vendor refund. It has its own entries and tax treatment, as in fire or storm damage to a rental.
- A tenant paying you back for a repair is a reimbursement, covered in tenant utility reimbursements.
- A returned deposit paid to a vendor or utility is an asset coming back. Debit Checking and credit the deposit account.
- A bounced payment to you is a different problem, covered in booking a bounced rent payment.
The steps each time
- Find the original bill and note its account, property and date.
- Record the refund or credit against that same account and property, not against income.
- Attach the vendor's refund notice or credit memo, as the IRS recordkeeping guidance recommends for supporting documents.
- Match the bank line to the entry at reconciliation, so the refund is not counted twice.
If the refund relates to a repair that was really an improvement you depreciate, adjust the depreciable cost instead. See repair or improvement.
How DoorKeeping handles it
When a vendor refund lands in a connected bank account, DoorKeeping flags the deposit as money in that is not rent, suggests the original bill and expense category, and waits for your approval before posting. Each property has its own ledger, so the refund reduces the right property's expense and the Schedule E report stays correct. Ask your preparer about refunds that arrive in a later tax year.
Sources
- IRS, Publication 525, Taxable and Nontaxable Income, read Oct 30, 2026
- IRS, Recordkeeping, read Oct 30, 2026
Questions
- Is a vendor refund income?
- Not in the same tax year. It reduces the expense it relates to. A refund of an expense deducted in an earlier year may be income in the year received, so tell your preparer.
- How do I record a vendor credit memo?
- Reduce the expense and record the credit as an amount the vendor owes you. When you apply it to a later bill, clear the credit and pay only the difference.
- Why does my bank balance not match after a credit memo?
- The bank only shows the cash you paid. If the credit is not on the books, the bill looks larger than the payment. Record the credit.