What is a balance sheet?
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 in 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, the 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 in the balance sheet.
What is Schedule L?
Schedule L, Balance Sheets per Books is the section in Form 1120, U.S. Corporation Income Tax Return 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 follows 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.
The IRS uses Schedule L to verify the accuracy of the tax reporting. The changes from the beginning to ending balances recorded in the balance sheet should be consistent with the income being reported in the tax return and reconciled on Schedule M-1 as well as the accumulated adjustments that have occurred in the shareholder’s equity accounts reported on Schedule M-2. These three schedules are interconnected, and a change or adjustment to one can affect the others.
The balance sheet also contains information that indicates to the IRS that certain income items or deductions should be present in the tax return.
When Schedule L is not required
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 in the tax return.
A corporation does not have to complete Schedules L, M-1, and M-2 if both of these conditions are true:
- 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.
These two conditions are a Yes/No question on Form 1120 Schedule K line 13. If both conditions are met, the corporation can opt out of completing Schedules L, M-1, and M-2.
To opt out of completing Schedules L, M-1, and M-2, from the Main Menu of the corporation return (Form 1120) select:
- Schedule K – 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 each less than $250,000, select Yes.
When Schedule L is required
If the corporation does NOT meet both requirements on Schedule K (Form 1120) Line 13, it is required to complete Schedule L, entering the balance sheet as reflected in the corporation’s books and records.
If there are any differences between the corporation's balance sheet and Schedule L, those differences should be explained in an attached statement with the tax return. As a practical matter, Schedule L should be entered before attempting to complete either Schedule M-1 or Schedule M-2 because certain items calculated on those schedules reconcile with items on the balance sheet.
At the Schedule L menu the preparer can enter most of the balance sheet items directly from the corporation’s records. However, certain amounts will automatically pull to the Schedule L from other sections of the Form 1120 since those balance sheet items have previously been entered elsewhere in the tax return.
To assist in entering Schedule L, the two sections of the balance sheet menu, the Assets Menu and the Liabilities and Equity Menu, are discussed below.
The Asset Menu
When you navigate to Schedule L in the corporation 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, the preparer will need to enter the beginning balance for each account.
1. Cash - In this section, you enter 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 can be pulled to Schedule L. The beginning and ending balances can be adjusted, and any adjustments can be carried 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 about 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 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 you will itemize any other current asset that has not been entered in the preceding lines.
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 an "other 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.
After selecting this menu line, select New, then enter a description of the asset followed by the beginning and ending balance amounts. As required by the IRS, the information you enter will be itemized on a statement attached to the tax return. The amounts entered 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.). For more information, see Sections 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, you will itemize any other investment assets (which could include an ownership positions in another business entity). Upon entering this field, you should select& New, then enter a description of the other investment asset and then enter the beginning and ending balance amounts. As required by the IRS, the information you enter will be itemized on a supporting statement attached to the tax return. The amounts entered 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.
Although adjustments to the ending depreciable asset balance can be made on this menu, any adjustment made here does 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 (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 in the tax return. The corporation may use a less accelerated depreciation method such as straight line in 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 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/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, 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 11b, 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 balances for intangible assets 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 the 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 you will itemize any other asset not otherwise reported above. Upon selecting this menu you should select New, then enter a description of the asset and the beginning and ending balance amounts.
As required by the IRS, the information you enter will be itemized on a statement attached to the tax return. The amounts entered are reported on Line 14, Columns (b) & (d) of Schedule L.
19. Total Assets - This is a calculated amount, consisting of all the amounts included in the 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 you 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.
The 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 ending balances in this menu.
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, you will itemize any other current liability that has not been entered above. A current liability is any liability that is due within twelve months that the corporation is legally obligated to pay.
Upon selecting this menu you should select New, then enter a description of the item and then enter the amount. As required by the IRS, the information you enter will be itemized on a statement attached to the tax return. The amounts entered 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 and notes payable in more than 1 year are reported on Line 20, Columns (b) & (d) of Schedule L.
6. Other Liabilities - In this section, you will itemize any other liability that has not been entered above. Other liabilities are any liability that are not due within twelve months.
Upon selecting this menu you should select New, then enter a description of the item and the amount. As required by the IRS, the information you enter will be itemized on a statement attached to the tax return. The amounts entered are reported on Line 21, Columns (b) & (d) of Schedule L.
7. Capital: Preferred Stock - The book value of the preferred stock is its par value, i.e., the stated or face value of a share of stock. Typically, this is recorded in the books of the corporation as the par value of a share of stock times the number of shares issued in the original (or subsequently amended) articles of incorporation. The book value of preferred stock is reported on Line 22a, Columns (a) & (c) of Schedule L.
8. Capital: Common Stock - The book value of the common stock is its par value, i.e., the stated or face value of a share of stock. Typically, this is recorded in the books of the corporation as the par value of a share of stock times the number of shares issued in the original (or subsequently amended) articles of incorporation. The book value of common stock is reported on Line 22b, Columns (a) & (c) of Schedule L, and the sum of preferred and common stock is reported on Line 22b, Columns (b) & (d) of Schedule L.
9. Additional 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). Paid in Capital is reported on Line 23, Columns (b) & (d) of Schedule L.
10. Retained Earnings - Appropriated - Appropriated retained earnings represents the accumulated earnings of the corporation that the board has reserved for certain specified purposes. These are reported on Line 24, Columns (b) & (d) of Schedule L. The ending Retained Earnings amount is pulled from Schedule M-2, so if any adjustments are needed they should be made in the Schedule M-2 menu.
11. Retained Earnings - Unappropriated - Unappropriated retained earnings represents the accumulated earnings of the corporation that are unrestricted as to their use. These are reported on Line 25, Columns (b) & (d) of Schedule L. The ending Retained Earnings amount is pulled from Schedule M-2, so if any adjustments are needed they should be made in the Schedule M-2 menu.
12. Adjustments to Shareholder Equity – In this section, you will itemize any adjustments made to the Shareholders’ equity that are not otherwise recognized on Schedule M-2.
Upon selecting this menu you should select New, then enter a description of the item and the amount. As required by the IRS, the information you enter will be itemized on a statement attached to the tax return.
An entry here is unusual. An entry may be needed here if the corporation engages in certain activities that may impact the shareholders equity but not otherwise affect the corporation's income reporting. Examples of such activities include:
- 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 (ESOP) debt;
- having compensation related to certain employee stock award plans.
Adjustments to shareholders’ equity is reported on Line 26, Columns (b) & (d) of Schedule L.
13. 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 reduces the equity in the corporation. Treasury Stock is reported on Line 27, Columns (b) & (d) of Schedule L.
14. Total Liabilities and Equity - This is a calculated amount consisting of the amounts entered (or the beginning balances automatically pulled) in this menu. The Total Liabilities and Equity amount is reported on Line 28, 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 28 should match.
15. Total Assets - This is a calculated amount consisting of all the amounts entered (or automatically pulled) in 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 28, Columns (b) & (d) of Schedule L. When the Balance Sheet is completed, the amounts reported on Line 15 as Total Assets, and on Line 28 as Total Liabilities and Shareholder’s Equity should match.
16. Difference - This is a calculated amount consisting of the difference between the Total Assets and the Total Liabilities and Shareholders’ Equity. This is the amount, if any, that the balance sheet is 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 Liabilities & Equity." 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 corporation’s books, or both.
Note: This is a guide on entering Schedule L in the C corporation return (Form 1120) in TaxSlayer Pro. This is not intended as tax advice.
Additional Information: