Lacerte Resources

General Tax Resources

Communities

Self-Study Tutorials

Balance Sheet & M-1/M-2

Prerequisites

You should be familiar with or have completed the Misc./Other Info and Income & Related Items exercises 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 and M-2 items.

LESSONS

Client/Shareholder/Officer Info & Stock Ownership
Misc.Other Info
Income & Related Items
Balance Sheet & M-1/M-2
Distributions & Basis Info
Change in Ownership
K-1 Overrides
Section Review

Facts

Enter the following information for a sample client:

Client number

TUTSCOR4

Client Information	Data entry:
Corporation Name	Tutorial S Corporation 4
Corporation DBA	Lesson 4
Fiscal year end	12
Accounting method	Cash

Income	Data entry:
Gross receipts	$900,000

Depreciation	Data entry:
Asset 1
Description	Building
Form	Form 1120S
Date placed in service	01/01/2002
Cost or basis	$250,000
Method	87
Prior depreciation	$12,553
Asset 2
Description	Equipment
Form	Form 1120S
Date placed in service	01/01/2005
Cost or basis	$50,000
Method	57
Book method	58

Balance Sheet	Data entry:
Assets	Beginning	Ending
Cash	$115,853	$998,000
Accounts receivable	$43,000	$27,500
Other current assets:
Prepaid rent	$9,000	$10,500
Note receivable	$2,500	$3,300

Buildings and other depreciable assets	$250,000	$300,000**
Less accumulated depreciation	$12,553	$22,533**
Land	$275,000	$275,000
Liabilities and Capital	Beginning	Ending
Accounts payable	$45,000	$56,500
Mortgages, notes payable - current year	$14,000	$1,250
Mortgages, notes payable - long term	$23,800	$44,000
Capital stock	$400,000	$400,000

** Check figures only -- see Program Considerations

Balance Sheet Miscellaneous	Data entry:
Current year book depreciation	Book (4)

Schedule M-2	Data entry:
Accumulated Adjustments Account
Beginning balance	$200,000

Program Considerations

Balance Sheet

In 2002, the IRS issued new instructions providing that the balance sheet and Schedule M-1 are not required to be completed if the corporation's total receipts for the tax year AND its total assets at the end of the tax year are less than $250,000. This is a significant change from prior years, when the balance sheet was always required and Schedule M-1 was required to be completed when total assets at the end of the tax year were at least $25,000.
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.
For prepaid taxes, the program can adjust Schedules L and M-1 automatically. Enter the total of the corporation's estimated tax payments plus any overpayment from the prior year as the ending asset amount for Prepaid federal tax. The program includes this amount on Schedule L, line 6, column (d). If you check the Accrue federal tax box in Screen 3.1, Misc. Info./Other Info./Amended, the program adjusts the Prepaid federal tax amount based on the actual tax calculated. The program reduces Prepaid federal tax (not below zero) and/or increases Federal tax payable as necessary, and adjusts Schedule M-1 automatically. This feature is also available for state tax accruals.
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

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 30, 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.
The program calculates the beginning balance of total retained earnings based on the beginning balance entries for Schedule M-2 accounts and other retained earnings. The ending balance is calculated in the following manner:

Beginning Retained Earnings, Sch. L, Line 24, column (b)

+ Net income per books, Schedule M-1, Line 1

+ Additions to Other Retained Earnings

+ AAA Other Additions to carry to Sch. L

- Distributions from AAA, Schedule M-2, Line 7, column (a)

- Distributions from OAA, Schedule M-2, Line 7, column (b)

- Distributions from PTI, Schedule M-2, Line 7, column (c)

- Dividend Distributions from accumulated E&P, Sch. K, Line 22

- Distributions in excess of Schedule M-2/E&P accounts

- Reductions to Other Retained Earnings

- AAA Other Reductions to carry to Sch. L

---------------------------------------------------------------

= Ending Retained Earnings, Sch. L, Line 24, column (d)

The program prepares a worksheet that reconciles the difference between ending retained earnings on the balance sheet and the ending M-2 accounts.

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:

The ending balance of Less Accumulated Depreciation on the S-corporation's balance sheet.
An M-1 adjustment for the difference between current year book and tax depreciation expense.
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 29, Balance Sheet and Screen 31, Schedule M-1 to override all default calculations.

ENTER	TO
Dollar Amount	Designate that the corporation 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 30) 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 16, 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 corporation 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 federal 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 corporation 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 corporation 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 corporation 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 16, 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:

The ending balance of Less Accumulated Amortization on the S-corporation's balance sheet.
The difference between federal and state amortization expense as calculated from Screen 16, Depreciation, and Screen 17, Direct Input.
The difference between actual book and calculated tax amortization from Screen 16, Depreciation, and Screen 17, 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 29, Balance Sheet and Screen 31, 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 override the option to print Schedule L Optional Statements.

Schedule M-1

As previously noted, the balance sheet and Schedule M-1 are not required to be completed if the corporation's total receipts for the tax year AND its total assets at the end of the tax year are less than $250,000. These can be forced in the Options or on a per-client basis in Screen 30, Balance Sheet Miscellaneous.
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. For items such as nondeductible expenses and tax-exempt income, enter the information in the appropriate fields in this screen. The program automatically carries this information to the respective lines of Schedules K, K-1, M-1 and M-2. 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

The program automatically computes the balances of retained earnings on the balance sheet from entries in Screen 32, Schedule M-2. For the Accumulated Adjustments Account, the program does not carry amounts you enter in Other additions or Other reductions to Schedule L because the AAA is not a reconciliation of retained earnings. Use the Amount of Other Additions to carry to Schedule L and Amount of Other Reductions to carry to Schedule L fields to adjust the program calculation of Ending Retained Earnings on Schedule L, line 24, column (d).
By default, the Option for AAA Distributions is set to Limited to balance. This limitation is in accordance with Reg. Section 1.1368-2(a)(3)(iii), which states that distributions under Section 1368(b) or Section 1368(c)(1) reduce the AAA, but not below zero. This means that any distributions entered will be automatically limited to the positive balance on line 6 of the AAA. You can, however, override this option in Screen 32, Schedule M-2 on a per-client basis.

How?

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

Open the sample client.
Click the applicable screen from the Contents tab.
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 input. If this number is incorrect, then the problem probably lies in the income or M-1 input.

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 1120S:

Schedule L
Line 15, column (b)	$682,800
Line 27, column (d)	$1,591,770

Schedule M-1
Line 1	$890,020

Schedule M-2
Line 8	$1,086,445

Also, note the difference between Schedule M-2 and the retained earnings.

Troubleshooting

Problem: My Balance Sheet does not balance.

Solution: Verify the input and review the calculation of Schedule L.

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

Solution: The program calculates this number as follows: Income (from Schedule K, line 23) plus any amounts on Schedule M-1 lines 5 and 6, minus any amounts on Schedule M-1 lines 2 and 3.

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