Balance Sheet, M-1, Capital & Liabilities

Prerequisites

You should be familiar with or have completed the Client/Partner Info & Percentages exercise in this section and the Depreciation exercise in the Common Tax Items section.

Objective

In this exercise, you will enter balance sheet items, M-1 adjustments, partners' capital, and share of liabilities.

  

Facts

Enter the following information for a sample client:

Client number TUTPAR3
Client Information Data entry:
Partnership Name Tutorial Partnership 3
Partnership DBA Exercise 3
Fiscal year end 12
Type of entity General Partnership
Tax matters partner # 1
Partner Information Data entry:
Partner Name Partner Type
Partner 1 Individual/General
Partner 2 Individual/General
Partner Percentages
End of Year 		Data entry:
Partner 1 50%
Partner 2 50%

The percentages are the same for profit, loss, and capital.

Depreciation Data entry:
Asset 1
Description Building
Form Form 1065
Date placed in service 01/01/2003
Cost or basis $90,000
Method 87
Prior depreciation $4,520
Asset 2
Description Equipment
Form Form 1065
Date placed in service 01/01/2005
Cost or basis $3,000
Method 57
Balance Sheet Data entry:
Assets Beginning Ending
Cash $68,270 $49,125
Trade notes and accounts receivable $23,000 $12,500
Inventories $15,000 $30,000
Buildings and other depreciable assets $90,00 $93,000**
Less accumulated depreciation $4,520 $9,040**
Land $160,000 $160,000
Liabilities Beginning Ending
Accounts payable $33,250 $63,520
Mortgages, notes payable - current year $16,000 $29,385
All nonrecourse loans $4,000 $4,000
Mortgages, notes payable - long term $33,500 $37,000

** Check figures only -- see Program Considerations

Balance Sheet Miscellaneous Data entry:
Current year book depreciation $4,520
Share of Liabilities Data entry:
Nonrecourse $4,000
Schedule M-1 Data entry:
Tax exempt interest $1,200
Schedule M-2/ Partners' Capital Data entry:
Beginning capital $250,000
Distributions -- cash $75,000

Program Considerations

Balance Sheet

  • The program carries the input to the respective lines on Schedule L. For cash, the program can adjust the ending balance for any rounding if the Option is set to Yes. For asset entries that do not have a specific line on Schedule L, the program creates a statement.
  • The program automatically calculates the ending balance of Buildings and other depreciable assets as follows:
    • Beginning balance of buildings and other depreciable assets, plus
    • Current year change in depreciable assets entered in the Depreciation screen

    For this calculation, a "depreciable asset" entered in Depreciation is defined as an asset placed in service during the current year having an entry other than 97, 98, or 99 in Method and that does not contain an entry of Amortization in Category or an entry in Amortization code section.

  • The calculation for the ending balance of Depletable assets and Intangible assets is calculated in the same fashion. An intangible asset is defined as an asset placed in service during the current year having an entry of 97 in Method, an entry of Amortization in Category, or an entry in Amortization code section.
  • The program automatically calculates the ending balance of Less accumulated depreciation, or you can enter a dollar amount to override this amount. The program bases its calculation on the entry in Current year book depreciation in the Screen 25, Balance Sheet Miscellaneous. If you leave the Current year book depreciation field blank, the program uses federal tax depreciation to calculate the ending balance of accumulated depreciation. This functionality is the same for Less accumulated depletion and Less accumulated amortization (these items display with an "*" in the Balance Sheet detail).

Balance Sheet Miscellaneous

For Current year book depreciation, you can enter a dollar figure or choose one of the options from the following table. The program uses this entry to calculate:

  1. The ending balance of Less Accumulated Depreciation on the partnership's balance sheet.
  2. An M-1 adjustment for the difference between current year book and tax depreciation expense.
  3. An M-1 adjustment for the difference between book and tax gains or losses on assets disposed of in the current tax year.

Note: If you do not use this field, the program defaults to using federal tax depreciation (see #1 on table) to calculate ending accumulated depreciation on the balance sheet and Schedule M-1 adjustments. However, you can use input fields in Screen 24, Balance Sheet and Screen 27, Schedule M-1 to override all default calculations.

ENTER TO

Dollar Amount
  • Designate that the partnership records depreciation on its books using different methods and lives than it uses on its tax return.
  • Add the amount entered to the beginning balance of Less accumulated depreciation. The program also reduces accumulated book depreciation based on depreciation entries or the override entered in Accumulated book depreciation on assets sold [O] (Screen 25) to arrive at the Less accumulated depreciation ending balance.
  • Print the difference between the dollar amount entered and depreciation expense on the federal tax return as an expense recorded on the books not included on this return or as a deduction not charged against book income on Schedule M-1.
Note: If you enter a dollar amount and have assets entered in Screen 14, Depreciation that were disposed of in the current tax year, you must also make an entry in Accumulated book depreciation on assets sold [O].

1 (default)*

*no entry required
  • Designate that the partnership uses the same methods and lives for book purposes that it uses for federal tax purposes.
  • Add current year federal tax depreciation expense to the beginning balance of Less accumulated depreciation. The program also reduces accumulated federal tax depreciation by the accumulated depreciation on assets sold to arrive at the Less accumulated depreciation ending balance.
  • Make no M-1 adjustments because the program assumes that current and prior year book depreciation are the same as federal tax depreciation.

2
  • Designate that the partnership uses the same methods and lives for book purposes that it uses for state tax purposes.
  • Add current year state tax depreciation expense to the beginning balance of Less accumulated depreciation. The program also subtracts accumulated state tax depreciation by the accumulated depreciation on assets sold to arrive at the Less accumulated depreciation ending balance.
  • Print the difference between state tax depreciation expense and federal tax depreciation expense as an expense recorded on the books not included on this return or as a deduction not charged against book income on Schedule M-1.
  • Print the difference between state and federal gains or losses on assets sold as a gain or loss on disposition of assets adjustment on Schedule M-1.

3
  • Designate that the partnership wants its federal balance sheet and Schedule M-1 to reflect federal depreciation and the state balance sheet and Schedule M-1 to reflect state depreciation.
  • Add current year federal tax depreciation expense to the beginning balance of Less accumulated depreciation. The program also reduces accumulated federal tax depreciation by the accumulated depreciation on assets sold to arrive at the Less accumulated depreciation ending balance.
  • Add current year state tax depreciation expense to the beginning balance of state Less accumulated depreciation. The program reduces accumulated state tax depreciation by the accumulated depreciation on assets sold to arrive at the state Less accumulated depreciation ending balance.
  • Make no federal M-1 adjustments because the program assumes that current and prior year book depreciation are the same as federal tax depreciation.
  • Make no state M-1 adjustments because the program assumes that current and prior year book depreciation are the same as state tax depreciation.

4
  • Designate that the partnership records depreciation on its books using different methods and lives than it uses on the tax return AND you are entering the book methods and lives on an asset by asset basis in the Book depreciation, if different fields in Screen 14, Depreciation. The program also prints a book depreciation schedule.
  • Add current year book depreciation expense from the book depreciation schedule to the beginning balance of Less accumulated depreciation. The program also reduces accumulated book depreciation by the accumulated depreciation on assets sold to arrive at the Less accumulated depreciation ending balance.
  • Print the difference between book depreciation from the book depreciation schedule and depreciation on the tax return as an expense recorded on the books not included on this return or as a deduction not charged against book income on Schedule M-1.
  • Print the difference between book and federal gains or losses on assets sold as a gain or loss on disposition of assets adjustment on Schedule M-1.
  • For Current year book amortization, you can enter a dollar figure or choose one of the options from the table above - the functionality is the same as depreciation. The program uses this entry to calculate:
  1. The ending balance of Less Accumulated Amortization on the partnership's balance sheet.
  2. The difference between federal and state amortization expense as calculated from Screen 14, Depreciation, and Screen 15, Direct Input.
  3. The difference between actual book and calculated tax amortization from Screen 14, Depreciation, and Screen 15, Direct Input.

Note: If you do not use this field, the program defaults to using federal tax amortization (see #1 on table) to calculate ending accumulated amortization on the balance sheet and Schedule M-1 adjustments. However, you can use input fields in Screen 24, Balance Sheet and Screen 27, Schedule M-1 to override all default calculations.

  • For depletion, the functionality is the same as depreciation and amortization.
  • Other functions available in this screen include the ability to omit the book depreciation schedules from printing with the return and the ability to force Schedules L, M-1, and M-2 to print.

Schedule M-1

  • The program calculates and carries the various income, expenses, and deductions to the applicable lines on Schedule M-1 automatically. Therefore, most of the entries in this screen are overrides. You can view information regarding these overrides and information as to which line on the M-1 an entry will flow by pressing [F1] on the applicable input field.

Schedule M-2, Partners' Capital

  • Enter the aggregate amounts for the applicable lines in the Analysis of Partner's Capital Accounts. These amounts carry to the appropriate lines of Schedule M-2. The program calculates line J of Schedule K-1 using these amounts along with the end of year ownership of capital percentages entered in Screen 8, Partner Percentages.

Share of Liabilities

  • Balance Sheet amounts for All non-recourse loans and other loans payable do not automatically carry to the partner's Schedule K-1s. These amounts should be entered in Screen 26, Share of Liabilities, and are allocated based on percentages entered in Screen 8, Partner Percentages.

How?

To enter Balance Sheet, Balance Sheet Miscellaneous, and Schedule M-1/M-2 items:

  1. Open the sample client.
  2. Click the applicable screen from the Contents tab.
  3. Enter the information from the tables above.

Tips & Shortcuts

  • Whenever you encounter balance sheet discrepancies, check the calculated net income per books. If this number is correct, then the problem probably lies in the balance sheet or M-2 input. If this number is incorrect, then the problem probably lies in the income or M-1 input.
  • You can view the detailed Capital Account Reconciliation to see a complete breakdown of the figures that comprise Line J of Schedule K-1.

To produce a per-partner Capital Account Reconciliation:

  1. Open Screen 3, Miscellaneous Information from the Contents tab.
  2. In the User Options Overrides section, enter 3 in the Capital account recon. field.
  3. At the Forms tab, view the Capital Account Reconciliation.

Review

You should have entered the Balance Sheet, Balance Sheet Miscellaneous, and M-1/M-2 information in the appropriate screens and viewed the following results on Form 1065 p.4 and Schedule K-1:

Schedule L
Line 22, column (b) $336,760
Line 22, column (d) $305,585
Schedule M-1
Line 1 $-3,320
Schedule M-2
Line 9 $171,680
Schedule K-1 - Partner 1
Line N, Ending capital account $85,841
Line 19 Code A, $37,500

Troubleshooting

Problem: My Balance Sheet does not balance.

Solution: Verify the input and review the calculation of Schedule L. The program adds line 9 of Schedule M-2 to the ending liabilities balance for line 22(d).

Problem: My Net Income per Books on Schedule M-1 is not correct.

Solution: The program calculates this number as follows: Line 9 (from Analysis of Net Income (Loss), line 1, Form 1065 p.4) minus any amounts on Schedule M-1 lines 2, 3, and 4, plus any amounts on Schedule M-1 lines 6 and 7. Verify that you have entered the tax exempt interest in the M-1 screen and the current year book depreciation in Screen 25, Balance Sheet Miscellaneous.

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