What is a Balance Sheet?
The balance sheet is a financial statement of the partnership that represents (as of the first day and the last day of the tax year) the dollar value recognized on the partnership's books of all of the partnership's assets, all of the amounts owed by the partnership (its liabilities), and the difference between the assets and liabilities (partners' capital).
In Form 1065, U.S. Return of Partnership Income, the balance sheet is Schedule L, showing the balances of the partnership's assets, liabilities, and partner capital accounts on the first day and the last day of the tax year. The method of accounting that the partnership uses, whether cash or accrual, may impact the entries in Schedule L.
Schedule L follows basic accounting principles for completing a balance sheet. The information that goes on the balance sheet is obtained from the partnership's books and records, and it is not generated by the tax return. Not all partnerships have to submit a balance sheet, and many smaller partnerships do not complete Schedule L.
For partnership returns required to complete Schedule L, the IRS uses the information in Schedule L to verify the accuracy of the tax reporting. Analyzing the changes from the beginning to the ending balances recorded in the balance sheet should be consistent with the income being reconciled on Schedule M-1 and the partners' capital accounts being analyzed on Schedule M-2. These three schedules are interconnected, and a change or adjustment to one of these schedules can affect the others.
The balance sheet also contains information that indicates to the IRS that certain items of income or deduction should be present in the tax return.
When Schedule L is not required
A partnership has to complete Schedule L (Balance Sheet), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Partner’s Capital Accounts) unless it can satisfy ALL of the following four requirements:
- The partnership’s total receipts were less than $250,000 for the tax year;
- The partnership’s total assets were less than $1 million at the end of the tax year;
- Schedule K-1’s are filed with the return and furnished to the partners on or before the due date (including extensions);
- The partnership is not filing or required to file Schedule M-3.
These four requirements are a question in Schedule B on line 4. In the partnership return in TaxSlayer Pro, this question is under the Schedule B menu, "Does This Partnership Meet All Four Requirements?", and is defaulted to No. If the partnership satisfies all four requirements, you can answer the question Yes and Schedules L, M-1, and M-2 don't need to be completed.
To opt out of completing Schedule L in the partnership return in TaxSlayer Pro, from the Main Menu of the return (Form 1065) select:
- Schedule B - Other Information
- Does This Partnership Meet All Four Requirements? - Select YES.
When Schedule L is required
If the partnership does not meet the four requirements in the question on Schedule B (Form 1065) Line 4, the partnership is required to complete Schedule L, entering the partnership's balance sheet as reflected on the partnership's books and records. In the event that there are any differences between the balance sheet in the partnership's books and records and Schedule L, those differences should be explained in an attached statement with the tax return.
As a practical matter, Schedule L should be completed before attempting to complete either Schedules M-1 or M-2 because certain items calculated on those schedules reconcile with items on the balance sheet. Most of the items entered in Schedule L come directly from the partnership's records. However, certain amounts TaxSlayer Pro will automatically pull to the Schedule L from other sections of Form 1065 since those balance sheet items have previously been entered elsewhere on the tax return.
In the partnership return in TaxSlayer Pro, the balance sheet menu is divided into two sections, the Asset Menu and the Liabilities & Capital Menu. Each of these two sections is discussed below.
The Asset Menu
When you navigate to Schedule L in the partnership return, it opens to the Asset menu. This menu contains all the asset categories that are reported on Schedule L.
If the previous year's tax return was prepared in TaxSlayer Pro and included Schedule L, the beginning account balances in the current year will have pulled from last year's ending account balances. Otherwise, you will need to enter the beginning balance for each account.
1. Cash - This item represents the beginning and ending total of all of the partnership's cash accounts, including cash on hand, petty cash, bank accounts, money market accounts, and certificates of deposit. 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 partnership are legally obligated to pay for the goods and/or services that they received from the partnership. This entry is normally only be made for entities using accrual accounting because the underlying revenue that generated the receivables was recognized by the partnership. When entering the accounts receivable ending balance, you can select the F10 key to detail each of the receivables in a supporting statement, but this supporting statement is not mandatory to file the return. The beginning and ending accounts receivable entries are reported on Line 2a, Columns (b) & (d) of Schedule L.
3. Less Bad Debt Allowance - This amount represents the reserve or allowance that has been made to account for the fact that some of the accounts receivables will not be collected. In the balance sheet, the bad debt allowance offsets accounts receivables. This entry is only made for entities using accrual accounting, and you can optionally select the F10 key to provide details about the bad debts in a supporting statement. The beginning and ending bad debt amounts are reported on Line 2b, Columns (a) & (c) of Schedule L, and these amounts are netted against the accounts receivable balances on Line 2b, Columns (b) & (d) of Schedule L.
4. Inventories - The beginning and ending inventory amounts entered on Form 1125-A, Cost of Goods Sold, are automatically pulled to this line. If an adjustment is needed, you can enter it and it 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 here for more information on cost of goods sold reported on Form 1125-A.)
5. U.S. Obligations - This entry is for any debt instrument owned by the partnership, such as U.S. Treasury notes or bonds, that are considered risk-free as they are guaranteed by the full faith and credit of the U.S. government. The beginning and ending amounts are reported on Line 4, Columns (b) & (d) of Schedule L.
6. Tax-Exempt Sec - This entry is for any state and local government obligations owned by the partnership whose income is excludable from gross income, including 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 - This line itemizes any other current asset not included on lines 1 through 6. Current assets are cash as well as assets that can be readily converted to cash within twelve months. Examples of an other current asset include a marketable security such as a publicly traded stock or a short-term loan that the partnership has made to a non-related party.
After selecting this line, select NEW, then enter a description, the beginning balance, and the ending balance. Other Current Assets are required to be itemized, and all the entries in this menu will be included in a statement attached to the return. Other Current Assets are reported on Line 6, Columns (b) & (d) of Schedule L.
8. Loans to Partners - This line shows the beginning and ending balances of any loans to the partners or to any person related to the partner. Generally, persons related to the partner are spouses, siblings, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). (For more information, see IRS section 267(b) and section 707(b),) An optional supporting statement can be created to itemize the ending balance, but this 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 line shows any real estate loans or mortgages that the partnership made to a third party. An optional supporting statement can be created to itemize the ending balance, but this supporting statement is not mandatory for filing the return. The beginning and ending amounts are reported on Line 7b, Columns (b) & (d) of Schedule L.
10. Other Investments - This line itemizes any other investment assets such as, for example, an ownership position in another business entity.
After selecting this line, select NEW, then enter a description, the beginning balance, and the ending balance. Other Investment Assets are required to be itemized, and all the entries in this menu will be included in a statement attached to the return. Other Investment Assets are reported on Line 8, Columns (b) & (d) of Schedule L.
11. Buildings & Other Depreciable Assets - This line shows the beginning cost or original basis amount for any buildings or other depreciable property (vehicles, machinery, etc.) used in the partnership's business. Enter an amount if one hasn't been pulled forward from last year's return. The ending balance should automatically pull from the tax return consisting of the total of the cost basis from all of the depreciable assets. Although there is a field to adjust the amount, any adjustment made does not carry back to the section of the tax return where the underlying depreciable asset was entered. The beginning and ending Building and Other Depreciable Asset amounts are reported on Line 9a, Columns (a) & (c) of Schedule L.
12. Less Accumulated Depreciation - This line shows the beginning accumulated depreciation for any buildings and/or other depreciable property used in the partnership is entered (unless it is automatically pulled from last year's return). The ending balance automatically pulls from the depreciation entries made in the tax return that carried to Form 4562 and consists of the total accumulated depreciation on all of the depreciable assets that have been entered in the tax return. In Schedule L, the beginning and ending Accumulated Depreciation amounts are reported on Line 9b, Columns (a) & (c), and the net amount of the total basis less accumulated depreciation is reported on Line 9b, Columns (b) & (d) of Schedule L.
It is not uncommon to need to adjust the accumulated depreciation amount because the partnership is permitted to use accelerated, special, and/or bonus depreciation on the tax return. The partnership may use a less-accelerated depreciation method such as straight line in its accounting records resulting in a difference with the tax return. This difference, if any, will need to be shown in the current year with respect to this year's income (loss) on the Schedule M-1 - Reconciliation of Income (Loss).
TaxSlayer Pro does not track the accumulated impact of any adjusting entries to the ending accumulated depreciation amount. It is the responsibility of the preparer or accountant to track any adjustments that are made to the accumulated depreciation balance from year to year. Any adjustment made in this section will not carry to the tax return where the underlying depreciable asset was entered.
13. Depletable Assets - This line shows the beginning and ending amounts for any asset subject to depletion are entered. These amounts must be entered directly on the balance sheet as they do not pull from any other section of the tax return. The beginning and ending depletable asset amounts are reported on Line 10a, Columns (a) & (c) of Schedule L.
14. Less Accumulated Depletion - This line shows the beginning and ending amounts of accumulated depletion for the depletable assets. The beginning and ending accumulated depletion amounts are reported on Line 10b, Columns (a) & (c) of Schedule L, and the net amount of the total depletable assets less the accumulated depletion is reported on Line 10b, Columns (b) & (d) of Schedule L.
15. Land - This line shows the beginning and ending amounts of any land owned by the partnership. 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 the ending balance can be adjusted, any adjustment made will not carry to the section of the tax return where the land amount was entered as a non-depreciable asset. The beginning and ending amounts are reported on Line 11, Columns (b) & (d) of Schedule L.
16. Intangible Assets - This line shows the beginning and ending amounts for any intangible assets subject to amortization. The total of intangible assets being amortized in the depreciation module will automatically pull to the ending balance amount. Although the ending balance can be adjusted, any adjustment made will not carry to the sections of that tax return where the intangible asset was entered. The beginning and ending amounts are reported on Line 12a, Columns (a) & (c) of Schedule L.
17. Less Accumulated Amortization - This line shows the beginning and ending accumulated amortization for any intangible asset subject to amortization (unless it is automatically pulled from last year's return). The ending balance automatically pulls from the entries made in the tax return that calculated amortization and consists of the total accumulated amortization on all of 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 12b, Columns (a) & (c) of Schedule L, and the net amount of the total intangible assets less accumulated amortization is reported on Line 12b, Columns (b) & (d) of Schedule L.
18. Other Assets - This line itemizes any other asset not otherwise reported above. After selecting this line, select NEW, then enter a description, the beginning balance, and the ending balance. Other Current Assets are required to be itemized, and all the entries in this menu will be included in a statement attached to the return. Other Assets are reported on Line 13, Columns (b) & (d) of Schedule L.
19. Total Assets - This is the calculated total of all of the amounts in the asset menu. Total Assets are reported on Line 14, Columns (b) & (d) of Schedule L.
20. Total Liab and Captl - Select this line to enter the Liabilities & Capital Menu. This line shows the calculated total from the Liabilities and Partners Capital Menu, and the beginning and ending amounts are reported on Line 22, Columns (b) & (d) of Schedule L.
When the Balance Sheet is completed correctly, the amounts reported on Line 14 as Total Assets and on Line 22 as Total Liabilities and Partners Capital should match.
The Liabilities & Capital Menu
This menu shows the partnership's liabilities as well as the total of the partners' capital accounts. If the previous year's tax return was prepared in TaxSlayer Pro and included Schedule L, the beginning account balances in the current year will have pulled from last year's ending account balances. Otherwise, you will need to enter the beginning balance for each account.
1. Accounts Payable - This line shows the amount that the partnership owed to vendors for products and services purchased on credit. The beginning and ending amounts for Accounts Payable are reported on Line 15, Columns b & d of Schedule L.
2. Mortgages, Notes < 1yr - This line shows the amount that the partnership 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 representing the loan payments due in the next year. The beginning and ending amounts for mortgages and notes payable in less than 1 year are reported on Line 15, Columns (b) & (d) of Schedule L.
3. Other Current Liabilities - This line itemizes any other current liability not included on Lines 1 and 2. A current liability is any liability that the partnership is legally obligated to pay and is due within twelve months.
After selecting this line, select NEW, then enter a description, the beginning balance, and the ending balance. Other Current Liabilities are required to be itemized, and all the entries in this menu will be included in a statement attached to the return. Other Current Liabilities are reported on Line 17, Columns (b) & (d) of Schedule L.
4. Nonrecourse Loans - This line shows the beginning and ending balances of any nonrecourse loans. A nonrecourse loan is any obligation of the partnership for which the individual partners are not liable or can be held personally responsible. Nonrecourse loans are reported on Line 18, Columns (b) & (d) of Schedule L.
5. Loans from Partners - This line shows the beginning and ending balances of any loans from the partners or any person related to the partner. Generally, persons related to the partner are spouses, siblings, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). (For more information, see IRC Section 267(b) and 707(b).)
An optional supporting statement can be created to itemize the ending balance, but this supporting statement is not mandatory for filing the return. The beginning and ending amounts are reported on Line 19a, Columns (b) & (d) of Schedule L.
6. Mortgages, Notes > 1yr - This line shows the amount that the partnership 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, the portion the partnership will not have to make payments on in the next year. The beginning and ending amounts for Mortgages, Notes Payable in more than 1 year are reported on Line 19b, Columns (b) & (d) of Schedule L.
7. Other Liabilities - This line itemizes any other liability that has not been entered previously and is not not due within twelve months. After selecting this line, select NEW, then enter a description, the beginning balance, and the ending balance. Other Liabilities are required to be itemized, and all the entries in this menu will be included in a statement attached to the return. Other liabilities are reported on Line 20, Columns (b) & (d) of Schedule L.
8. Partners' Capital - The beginning partners' capital account should match the total of the beginning capital accounts entered in all the partner Schedules K-1 Part II, Item L.
The ending balance entry should match the amount that is calculated on Schedule M-2, Analysis of Partners' Capital Accounts, Line 9. (This amount is automatically pulled to Schedule M-2 to assist you in completing that schedule.) The ending balance amount should also match the total of the ending capital accounts entered in all the partner Schedules K-1 Part II, Item L.
9. Total Liabilities and Capital - This is the sum of the previous lines entered and is reported on Line 22, Columns (b) & (d) of Schedule L. When the Balance Sheet is completed, the amounts reported on this line and on Line 14 as Total Assets should match.
10. Total Assets - This is the sum of the amounts in each column of the Asset Menu and is reported on Line 14, Columns b & d of Schedule L. When the Balance Sheet is completed, the amounts reported on Line 14 as Total Assets and on Line 22 as Total Liabilities and Partners Capital should match.
11. Difference - This is the calculated difference between the total assets and the total liabilities and capital, and the amount showing is the amount by which the balance sheet is considered out of balance.
If the balance sheet is out of balance, you'll see a warning when exiting the Schedule L menu: "Total Assets Do Not Equal Total Liabilities & Capital." While the IRS will accept a tax return electronically filed with a Schedule L that does not balance, an out of balance Schedule L indicates that there may be errors in either the tax return, the partnership’s books, or both.
Note: This is a guide on entering Schedule L in the partnership return in TaxSlayer Pro. This is not intended as tax advice.
Additional Information:
IRS Publication 541 - Partnerships
IRS: Instructions for Form 1065 - U.S. Return of Partnership Income
Creating a Basic Form 1065 - U.S. Return of Partnership Income
Form 1065 - Schedule M-2 - Analysis of Partners' Capital Accounts