Schedule M2 and L on 1065

[AuditorTurnedGood]

Hey all,

I'll start by saying I never take on returns requiring schedules L and M1 and M2 as I have this problem every time. I cannot get the L to balance to the end of the M2. I should say I use Drake software.

The problem appears to be in the owner's equity calculations. The client does not keep a balance sheet, so I am having to produce one based on client numbers and the prior year tax return (for basis) for the Schedule L. The calcualtions are essentially saying that I should have about 22K more in assest than I do, as the shareholder equity reconciliation on M2 is 22K off from liabilities and equity on the Schedule L. Any ideas? How big an issue is it if the two don't match? Grrrrr to the Schedule L. Thanks all!!!

ATG

[David1980]

A = L + E

So if you should have $22k more in assets, it could also be $22k less in liabilities or $22k less in equity.

So perhaps they paid off some liabilities, perhaps the assets has an extra $22k in cash, perhaps he took $22k of distributions that he didn't report to you. Without basically auditing the books and bank statements these can become a major pain.

[AuditorTurnedGood]

so,

what I'm hearing is that there is no easy way to take care of this. Can I simply adjust the shareholder's equity section to get it all to balance out? I'm at a bit of a loss, since I have seen the statements, and have verifyed the distributions and assets of the company. The company has no liabiities. Any idea what to do now? Thanks so much for the quick reply!!

MAS

[JG EA]

You can also do a cash flow statement and see if they put in money or distributed money. Money in and money out for expenses (not depreciation), for assets bought in the year, for all the meals expense, etc. When you put those figures of contributions to or distributions from into the return maybe it'll balance then.

[BHoffman]

Is your M1 correct? I sometimes reconcile book to tax by hand just to make sure I entered all of the necessary M1 adjustments. M1 line 1 is one of the good ways to make sure you haven't made any data entry errors. That number should be exactly your book net income number.

If you're sure you have a good M1, then perhaps something in the balance sheet is off (as you suspect).

Did you make sure your balance sheet Retained Earnings jives with your book income?

Beginning balance retained earnings + current year income + capital contributions - capital distributions = ending balance retained earnings. If you are off, then any one of these numbers could be wrong.

Are there any numbers elsewhere on the tax return that seem close to that $22k? Distributions? Sec. 179? If you divide the $22k in half, anything ringing a bell? There are lots of places in Drake to enter the same data and you can double up if you aren't careful.

I believe these things do matter because if your beginning retained earnings seems off, then something may have been counted twice or counted not at all in the current year. Retained earnings is like the anchor.

I'm sorry you're having reconciliation problems. That is very frustrating and it's tempting to just dump the difference into current period distributions/contributions, but the answer is there and you can find it Good luck!

[AuditorTurnedGood]

Thanks

for all you help everyone! I will be meeting with the client early next week to go through the books with a fine toothed comb. THis one might end up on extension yet.

ATG