Unappropriated Retained Earnings

[geekgirldany]

This questions deals with a C-Corp. My only problem is the Balance sheet.

Biggest discrepancy, interest for a large building loan which was never added to the balance of the note. Deducted as an expense.
So payments coming off each month, not broken down to interest or principal. How I handle this is DR to Interest Exp and CR to Note Payable. This was never done in prior years.

So, the amount is rather large that that is off.

I believe I should enter this amount in Schedule M-1, Line 6, Other Decrease and include statement that prior years retained earnings were not correct. Is that the correct way to handle it?
I would like to double check before I finalize the return.

[Roland Slugg]

I'm not buyin' any of this. First of all, when interest is paid, you don't add the interest paid to the balance of the note. Next, if the corp maintains a double-entry ledger and journals, it should be easy to see where everything went and what accounts may be off ... and why. Finally, a "hybrid" method of accounting refers to accrual basis for sales (and purchases of inventory) and cash basis for everything else ... i.e. all expenses. Accordingly, if interest on the loan was paid, it would/should have been deducted, but if it wasn't paid, it wouldn't be added to the loan balance ... at least not if the books are kept on a tax basis.

[geekgirldany]

The interest was deducted on the tax return.

The balance on the books for the loan does not match what the bank has as of 12/31. If a client enters the loan balance and does not break down payments between principal and interest.... the balance will not be correct. So with many of my other clients I would DR Interest Expense and Credit Notes Payable. This would get it to the correct balance shown by the bank.

[TXEA]

If you have the balance of the loan from the bank, just Dr Interest Expense and credit Note Payable-Bank. The bank should be able to provide the interest as well. If it is not correct after reconciling the loan balance to the balance per the bank at EOY, then the beginning of year loan balance is off.

It is not uncommon that the client will post the entire payment (P & I) to the note payable. You just have to adjust at EOY.

[geekgirldany]

Thank you. That is what I am doing. Unfortunately, the prior accountant never did this adjustment along with a few other things in prior years. Made this return very complicated. I have it reconciling now with excel worksheets to back up adjustments. Quite an experience.

[Snaggletooth]

GAAP needed

Often topics are presented on this forum by otherwise excellent tax people but needing a strong background in GAAP. I'm not throwing rocks at Geekgirl and I hope she knows that. Many times some of us with strong tax knowledge overlook GAAP principles because their educational training pointed toward an EA rather than CPA. I have myself fallen short in GAAP knowledge.

The subject at hand is a classic, not so much by Dany as by the former accountant. Sounds like Dany is making a diligent effort to put Humpty Dumpty back together again. As I read through the discussion thread, I can't really tell what happened, so I can't really unravel the mess.

The term Unappropriated Retained Earnings really means "all" prior earnings not earmarked by the governing corporate officers for special spending, so for reconciliation purposes, there are no other reconciling items to Retained Earnings other than the earmark itself, so this doesn't really pose a difficult question for M-1 and M-2 stuff. Unless there is an earmark, ALL Retained Earnings are Unappropriated.

Small corporations under a certain threshold of assets are not required to even prepare M-1 or M-2. Preparers who ignore M-1 are in my opinion guilty of a disservice to the taxpayer. The balance sheet is prepared on a "book" basis, or hopefully "GAAP," unless on a cash basis. Reconciling items are either permanent or timing. The preparer should maintain, and even deliver to the client, a list of all "timing" reconciling items, so the next preparer (be it you or someone else) can make sure the client has the benefit of these items in the future.

Many of you are already aware of the above, and if so I apologize for wasting your time in reviewing the "Tax vs. GAAP" issue. Safe to say that as a general rule, measurement of income is actually the same as GAAP unless a code/reg defines it otherwise. The most common book-to-tax difference is for taxpayers who use Cash Basis accounting.

[LTaxes]

Small corporations under a certain threshold of assets are not required to even prepare M-1 or M-2. Preparers who ignore M-1 are in my opinion guilty of a disservice to the taxpayer. The balance sheet is prepared on a "book" basis, or hopefully "GAAP," unless on a cash basis. Reconciling items are either permanent or timing. The preparer should maintain, and even deliver to the client, a list of all "timing" reconciling items, so the next preparer (be it you or someone else) can make sure the client has the benefit of these items in the future.

FWIW, NJ requires all corps to file these schedules. Every year, I get a few new clients who already have very messy books and then come in with blank schedules on their prior tax returns. I have to break the bad news that we will have to spend lots of billable time reconstructing their balance sheets. Some are cooperative and glad to have it done right. Some just don't care very much. Either way, it's a massive headache.