Schedule L – Balance Sheets per Books is the section in Form 1120S – U.S. Income Tax Return for an S Corporation where the corporation reports to the IRS their Balance Sheet as found in the corporation’s books and records. The format that is used for reporting Schedule L will follow basic accounting principles for completing a balance sheet. The information that goes on the balance sheet is obtained from the corporation’s books and records and it is not solely generated by the tax return.
By definition, the Balance Sheet is a financial statement of the corporation that represents (as of the first and last day of the tax year), the dollar value recognized on the corporation’s books of all of the corporation’s Assets, all of the amounts owed by the corporation (Liabilities), and the amount which comprises the difference between the assets and liabilities, which is the total of all of the individual shareholder’s equity or investment in the corporation (Shareholders Capital). Basically, a Schedule L – Balance Sheet contains the Assets which equals the Liabilities and Equity (Capital Stock, Paid in Capital and Retained Earnings) that existed in the corporation on the first and last day of the tax year. When completing a balance sheet the method of accounting (Cash or Accrual) that the corporation uses may impact the entries that are contained on the Schedule L.
This section of the tax return is used by the IRS to verify the accuracy of the tax reporting because analyzing the changes from the beginning to ending balances recorded in the Balance Sheet should be consistent with the income being reported on the tax return and reconciled on Schedule M-1 as well as the accumulated adjustments that have occurred in the shareholder’s equity accounts being analyzed on Schedule M-2. These three schedules (Schedule L, M-1 and M-2) are inter-connected and a change or adjustment to one of these schedules can affect the other schedules. The Balance Sheet also contains information that would indicate to the IRS that certain income items or deductions should be present on the tax return.
Not all corporations have to submit a balance sheet, and many smaller corporations do not complete Schedule L. However, when a corporation is required to submit a balance sheet with the tax return, it is critical to submit an accurate balance sheet that is consistent with the other items reported on the tax return. When Schedule L is NOT required to be completed:
A corporation does not have to complete Schedule L (Balance Sheet), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Shareholder’s Capital Accounts) if it meets BOTH conditions on lines 11a and 11b of the 1120S Schedule B (This question was on Line 10a and 10b of Schedule B for tax years prior to 2018):
- The corporation’s total receipts were less than $250,000 for the tax year, and
- The corporation’s total assets were less than $250,000 at the end of the tax year
If both conditions are met, the corporation can opt out of completing Schedule L and Schedule M-1. To opt out of completing the schedules, from the main menu of the return (Form 1120S) select Schedule B – Other Information > Receipts and Assets at year end less than 250,000. 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, select Yes.
When Schedule L is required:
If the corporation does NOT meet both requirements set forth in Schedule B (Form 1120S), Line 11, the corporation is required to complete Schedule L and enter the balance sheet as reflected on the corporation’s books and records. If there are any differences between the balance sheet contained in the books and records of corporation and balance sheet submitted on Schedule L, those differences should be explained in an attached statement with the tax return. As a practical matter, Schedule L – (Balance Sheet) should be entered before attempting to complete either Schedule M-1 (Reconciliation of Income) or Schedule M-2 (Analysis of Accumulated Adjustment Accounts) because certain items calculated on those schedules reconcile with items on the balance sheet.
At the Schedule L Balance Sheets per Books Menu the user can enter most of the balance sheet items directly from the corporation’s records. However, certain amounts [#AFFILIATE#] will automatically pull to the Schedule L from other sections of the Form 1120S since those balance sheet items have previously been entered elsewhere on the tax return. To assist in the entry of the Schedule L, the two sections of the balance sheet menu, the Asset Menu and the Liabilities and Capital Menu are discussed below.
To complete the Schedule L, from the main menu of the tax return (Form 1120S) select Schedule L – Balance Sheets. The first section of the Schedule L, the Asset Menu, will open. It contains all the asset categories that are reported on the Schedule L. If the previous year tax return was done in Keystone Tax Solutions Pro and it included a Schedule L – (Balance Sheet), all the beginning account balance amounts will pull from last year’s ending account balances. Otherwise, the beginning amounts for each asset, liability and shareholder’s capital will need to be entered.
Asset Menu – At this menu ALL the assets of the corporation are either entered or pulled from other sections of the tax return. To assist in the entry of the amounts on this section of the Balance Sheet, each line of the Asset Menu is described below.
1. Cash – In this section, the user enters the beginning and ending total of all cash accounts of the corporation. This entry includes all cash and cash equivalent accounts such as bank accounts, money markets and/or certificates of deposit. It also includes any cash on hand or petty cash accounts. The beginning and ending cash entries are reported on Line 1, Columns (b) & (d) of Schedule L.
2. Accounts Receivable– This item represents any unpaid amount that clients of the corporation are legally obligated to pay for the goods and/or services that they received from the corporation. This entry would normally only be made for entities using accrual accounting because the underlying revenue that generated the receivables was recognized by the corporation. When entering the Accounts Receivable ending balance, a supporting schedule may be created to delineate the receivable amount, but this supporting statement is not mandatory to file the return. The beginning and ending accounts receivable entries are reported on Line 2a, Columns (a) & (c) of Schedule L.
3. Less Bad Debt Allowance– This balance represents the reserve or allowance that has been made to account for the fact that some of the accounts receivables will not be collected. This amount will offset a portion of the entry made for Accounts Receivables. This entry would only be made for entities using accrual accounting and a supporting schedule may be created to delineate the ending bad debt amount. The beginning and ending bad debt amounts are reported on Line 2b, Columns (a) & (c) of Schedule L. The Net Amount of the Accounts Receivables and Less Bad Debt Allowance is reported on Line 2b, Columns (b) & (d) of Schedule L.
4. Inventories – In this section the beginning and ending inventory amounts entered on Form 1125-A – (Cost of Goods Sold) are automatically pulled to the Schedule L. Adjustments to the ending inventory balance can be made on this menu, and any adjustment made in this section will automatically carry back to Form 1125-A. The beginning and ending inventory amounts are reported on Line 3, Columns (b) & (d) of Schedule L. See: Form 1125-A – Cost of Goods Sold.
5. U.S. Obligations – This entry is for any debt instrument, such as U.S. Treasury Notes or Bonds, that are guaranteed by the full faith and backing of the United States, that is owned by the corporation. These investments are a risk-free asset and are separately stated on the Schedule L. The beginning and ending amounts are reported on Line 4, Columns (b) & (d) of Schedule L.
6. Tax-Exempt Sec – In this section any state and local government obligations that are considered excludable from gross income are entered. This also includes any mutual fund or other similar investment that distributes tax exempt interest or dividends. The beginning and ending amounts are reported on Line 5, Columns (b) & (d) of Schedule L.
7. Other Current – In this section the user will itemize any other current asset that has not been entered on this Asset Menu on Lines 1 through 6. Current assets are any asset that is cash or can be readily converted to cash within twelve months, and all the assets entered above are current assets. Examples of another Current Asset include, a marketable security such as a publicly traded stock because it can be sold easily and converted to cash within a twelve-month period, or any short-term loans that the corporation has made to a non-related party.
Upon entering this field, the user should select ‘NEW’ and then enter a description of the Other Current Asset and then enter the beginning and ending balance amounts. These ‘Other Current Assets’ are required to be itemized on a statement attached to the tax return and they are reported on Line 6, Columns (b) & (d) of Schedule L.
8. Loans to Shareholders – In this section, the beginning and ending balances of any loans to the shareholders, or any person related to the shareholder, are entered. Generally, persons related to the shareholder are spouses, siblings, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). See: Section 267(b) and 707(b) of the Internal Revenue Code. When entering the Loan to Shareholders ending balance, a supporting schedule may be created to delineate the amount, but this supporting statement is not mandatory for filing the return. The beginning and ending amounts are reported on Line 7a, Columns (b) & (d) of Schedule L.
9. Mortgage & Real Estate Loans – This section represents any real estate loans or mortgages that the corporation made to third parties. When entering the ending balance, a supporting schedule may be created to delineate the amount, but this supporting statement is not mandatory for filing the return. The beginning and ending amounts are reported on Line 8, Columns (b) & (d) of Schedule L.
10. Other Investments – In this section, the user will itemize any other investment assets (which could include an ownership positions in another business entity). Upon entering this field, the user should select ‘NEW’ and then enter a description of the other investment asset and then enter the beginning and ending balance amounts. These ‘Other Investment Assets’ are required to be itemized on a supporting statement attached to the tax return and they are reported on Line 9, Columns (b) & (d) of Schedule L.
11. Buildings & Other Depreciable Assets – In this section, the beginning cost or original basis amount for any buildings or other depreciable property (vehicles, machinery, etc.) used in the corporation’s business are entered (unless it is automatically pulled from last year’s return). An ending balance amount should automatically pull from the tax return, and it consists of the cost basis amounts from all the entries that generated depreciation in the tax return and then carried that information to Form 4562 – Depreciation. Although adjustments to the ending depreciable asset balance can be made on this menu; any adjustment made on the Balance Sheet do not carry to the other sections of that tax return where the underlying depreciable asset was entered. The beginning and ending Building and Other Depreciable Asset amounts are reported on Line 10a, Columns (a) & (c) of Schedule L.
12. Less Accumulated Depreciation – In this section, the beginning Accumulated Depreciation for any buildings and/or other depreciable property used in the corporation is entered (unless it is automatically pulled from last year’s return). An ending balance amount automatically pulls from the depreciation entries made in the tax return that carried to Form 4562 – Depreciation. The amount that pulls to this ending Accumulated Depreciation balance consists of the total accumulated depreciation on ALL the depreciable assets that have been entered in the tax return. The beginning and ending Accumulated Depreciation amounts are reported on Line 10, Columns (a) & (c) of Schedule L. The Net Amount of the Building and Other Depreciable Assets Less the Accumulated Depreciation is reported on Line 10b, Columns (b) & (d) of Schedule L.
It is not uncommon for adjustments to occur to the accumulated depreciation amount because the corporation is permitted to use accelerated, special and/or bonus depreciation on the tax return. The corporation may use a less accelerated depreciation method such as straight line on their accounting records (books) resulting in the difference between the tax return and the book records depreciation amounts. This difference is shown in the current year with respect to this year’s income (loss) on the Schedule M-1 – Reconciliation of Income (Loss).
The tax program does not track the accumulated impact of any adjusting entries to the ending accumulated depreciation amount, and it is the responsibility of the preparer/accountant to track any adjustments that are made to the accumulated depreciation balance from year to year. Although adjustments to the ending accumulated depreciation balance can be made on the Balance Sheet; any adjustment made in this section will not carry to the tax return where the underlying depreciable asset was entered.
13. Depletable Assets – In this section, the beginning and ending amounts for any asset subject to Depletion are entered. These amounts must be entered directly on the Balance Sheet and do not pull from any other section of the tax return. The beginning and ending Depletable Asset amounts are reported on Line 11a, Columns (a) & (c) of Schedule L.
14. Less Accumulated Depletion – In this section, the beginning and ending Accumulated Depletion for any Depletable Asset are entered. The beginning and ending Accumulated Depletion amounts are reported on Line 11b, Columns (a) & (c) of Schedule L. The Net Amount of the Depletable Assets Less the Accumulated Depletion is reported on Line 11, Columns (b) & (d) of Schedule L.
15. Land – In this section, the beginning and ending amounts of any land owned by the corporation are entered. If land is entered in the depreciation module in any other section of the tax return as a non-depreciable asset, those amounts will automatically pull to the ending balance amount. Although adjustments to the ending land balance can be made on this menu; any adjustment made in this section will not carry to the sections of that tax return where the land amount was entered as a non-depreciable asset. The beginning and ending amounts are reported on Line 12, Columns (b) & (d) of Schedule L.
16. Intangible Assets – In this section, the beginning and ending amounts for any Intangible Assets subject to amortization are entered. If an Intangible Asset was entered in the depreciation module in any other section of the tax return as an asset subject to amortization, those asset amounts will automatically pull to the ending balance amount. Although adjustments to the ending Intangible Asset balance can be made on this menu; any adjustment made in this section will not carry to the sections of that tax return where the Intangible Asset was entered as an asset subject to amortization. The beginning and ending Intangible Assets amounts are reported on Line 13a, Columns (a) & (c) of Schedule L.
17. Less Accumulated Amortization – In this section the beginning and ending Accumulated Amortization for any Intangible Asset subject to amortization are entered (unless it is automatically pulled from last year’s return). An ending balance amount automatically pulls from the entries made in the tax return that calculated amortization. The amount that pulls to this ending Accumulated Amortization balance consists of the total accumulated amortization on ALL the intangible assets that have been entered in the tax return that are subject to amortization. The beginning and ending Accumulated Amortization amounts are reported on Line 13b, Columns (a) & (c) of Schedule L. The Net Amount of the Intangible Assets Less the Accumulated Amortization is reported on Line 13b, Columns (b) & (d) of Schedule L.
18. Other Assets – In this section the user will itemize any Other Asset not otherwise reported. Upon entering this field, the user should select ‘NEW’ and then enter a description of the Other Asset and then enter the beginning and ending balance amounts. These ‘Other Assets’ are required to be itemized on a supporting statement attached to the tax return and they are reported on Line 14, Columns (b) & (d) of Schedule L.
19. Total Assets – This is a calculated amount by the tax program, consisting of ALL the amounts entered (or automatically pulled) on this Asset Menu. Total Assets are reported on Line 15, Columns (b) & (d) of Schedule L. 20. Total Liabilities and Equity – This line contains the calculated total from the Liabilities and Shareholder’s Capital Menu, which the user can access in this section. The Total Liabilities and Capital amounts is reported on Line 27, Columns (b) & (d) of Schedule L. When the Balance Sheet is completed, the amounts reported on Line 15 as Total Assets and on Line 27 as Total Liabilities and Shareholder’s Equity should match.
Liabilities and Equity Menu – At this menu ALL the Liabilities of the corporation and the Shareholder’s Equity accounts are entered. Only the beginning balances will automatically pull from last year’s return in this Menu. To assist in the entry of the amounts on this section of the Balance Sheet, each line of the Liabilities and Equity Menu is described below.
1. Accounts Payable – This item represents the amount that the corporation owed at the beginning and end of the year to vendors for products and services purchased on credit. The beginning and ending amounts for Accounts Payable are reported on Line 16, Columns b & d of Schedule L.
2. Mortgages, Notes < 1yr – This item represents the amount that the corporation owed at the beginning and end of the year on any mortgage or loan that is due in the next twelve months. This is the short term or current portion of such loans because the corporation will have to make these loan payments in the next year. The beginning and ending amounts for Mortgages, Notes Payable in less than 1 year are reported on Line 17, Columns (b) & (d) of Schedule L.
3. Other Current Liabilities – In this section, the user will itemize any other Current Liability that has not been entered on this Liabilities and Capital Menu on Lines 1 and 2. Current liabilities are any liability that is due within twelve months that the corporation is legally obligated to pay. Upon entering this field, the user should select ‘NEW’ and then enter a description of the item and then enter the amount. These ‘Other Current Liabilities’ are required to be itemized on a supporting statement attached to the tax return. These other current liabilities are reported on Line 18, Columns (b) & (d) of Schedule L.
4. Loans from Shareholders – In this section, the beginning and ending balances of any loans from shareholders or any person related to the shareholder are entered. Generally, persons related to the shareholder are spouses, siblings, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). See: Section 267(b) and 707(b) of the Internal Revenue Code. When entering the Loan from Shareholder’s ending balance, a supporting schedule may be created to delineate the amount, but this supporting statement is not mandatory for filing the return. The beginning and ending amounts are reported on Line 19, Columns (b) & (d) of Schedule L.
5. Mortgages, Notes > 1yr – This item represents the amount that the corporation owed at the beginning and end of the year on any mortgage or loan that is payable more than one year in the future. This is the long-term portion of such loans because the corporation will not have to make these loan payments in the next year. The beginning and ending amounts for Mortgages, Notes Payable in more than 1 year are reported on Line 20, Columns (b) & (d) of Schedule L.
6. Other Liabilities – In this section, the user will itemize any other liability that has not been entered on this Liabilities and Capital Menu. Other liabilities are any liability that are not due within twelve months. Upon entering this field, the user should select ‘NEW’ and then enter a description of the item and then enter the amount. These ‘Other Liabilities’ are required to be itemized on a supporting statement attached to the tax return. These other liabilities are reported on Line 21, Columns (b) & (d) of Schedule L.
7. Capital Stock – The Capital Stock account represents the total book value of the common and preferred stock issued by the corporation. Typically, the book value of the common or preferred is the Par Value of the stock, which is the stated or face value of a share of stock. Typically, this is recorded on the books of the corporation as the par value of a share of stock times the number of issuance price in the original (or subsequently amended) articles of incorporation. The book value of Capital stock is reported on Line 22, Columns (b) & (d) of Schedule L.
8. Paid in Capital – The Paid in Capital account represents the additional amount paid into the corporation by the Shareholder(s) above the par value when the common and/or preferred stock was issued by the corporation to the Shareholder(s). The Paid in Capital is reported on Line 23, Columns (b) & (d) of Schedule L.
9. Retained Earnings – The Retained Earnings account represents the accumulated earnings of the corporation that have not been distributed to the Shareholders but have been retained by the corporation. Retained Earnings is reported on Line 24, Columns (b) & (d) of Schedule L. The ending Retained Earnings amount is pulled from Schedule M-2 – Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholders’ Undistributed Taxable Income Previously Taxed. Most entries to adjust the ending Retained Earnings amount should be made on the Schedule M-2 menu.
10. Adjustment to Shareholder Equity – In this section, the user will itemize any adjustments made to the Shareholders’ equity that are not otherwise recognized on the Schedule M-2. Upon entering this field, the user should select ‘NEW’ and then enter a description of the item and then enter the amount. Any adjustments that have been made to the Shareholders Equity are required to be itemized on a supporting statement attached to the tax return. This section is not commonly used unless the corporations engages in certain activities that may impact the shareholders equity but not otherwise affect the income reporting of the corporation. Examples of such activities are having unrealized gains or losses on securities held “available for sale”, engaging in foreign currency transaction adjustments, recognizing excess pension liability for prior unrecognized service, having guarantees of employee stock ownership plan debt and having compensation related to certain employee stock award plans. The Adjustments to Shareholders’ Equity is reported on Line 25, Columns (b) & (d) of Schedule L.
11. Treasury Stock – The amount entered for Treasury Stock represents the repurchase of capital stock by the corporation after the capital stock was originally issued. The amount entered for Treasury Stock will reduce the Equity in the corporation. Treasury Stock is reported on Line 26, Columns (b) & (d) of Schedule L.
12. Total Liabilities and Equity – This is a calculated amount by the tax program consisting of the amounts entered (or the beginning balances automatically pulled) on this Liabilities and Equity Menu. The Total Liabilities and Equity amounts is reported on Line 27, Columns (b) & (d) of Schedule L. When the Balance Sheet is completed, the amounts reported on Line 15 as Total Assets and reported as Total Liabilities and Shareholder’s Equity on Line 27 should match.
13. Total Assets – This is a calculated amount by the tax program consisting of all the amounts entered (or automatically pulled) on the Asset Menu. This total is reported on Line 15, Columns b & d of Schedule L. The Total Liabilities and Shareholders’ Equity amounts are reported on Line 27, Columns (b) & (d) of Schedule L. When the Balance Sheet is completed, the amounts reported on Line 15 as Total Assets, and on Line 27 as Total Liabilities and Shareholder’s Equity, should match.
14. Difference – This is a calculated amount by the tax program consisting of the difference between the calculated Total Assets and the calculated Total Liabilities and Shareholders’ Equity. This is the amount, if any, that the Balance Sheet is considered out of balance. A warning will also be provided when exiting the Schedule L Menu stating “Total Assets Do Not Equal Liabilities & Equity. Do you wish to continue working on the balance sheet?” The IRS will accept a tax return electronically filed with a Schedule L that does not balance. However, such a return is an indication that errors may exist in either the tax return, the corporation’s books or both.
NOTE: This is a guide on entering Form 1120S – U.S. Income Tax Return for an S Corporation Income, Schedule L – Balance Sheet per Books into Keystone Tax Solutions Pro. This is not intended as tax advice.
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