C Corp Balance Sheet

[Tax Sleuth]

When a C Corporation had negative retained earnings at the end of its fiscal year, the prior accountant would balance the balance sheet by increasing Loans from shareholders in order to make up for this difference. I'm working on the corporation's tax return for this year, and once again, there is a loss, which will increase the negative amount for retained earnings for the year. The shareholder didn't actually loan more money to the corporation during this year. How should this be dealt with on the Form 1120 Schedule L in order to balance the balance sheet? Is there another entry that can be made to make up for this difference without triggering a taxable event?

[JON]

Could need a lot more information, but if when you recorded the cash deposits amounts were coming in from the stockholder if you are lucky that may be right. Are the notes updated with appropriate interest rates and payments. Lots of questions - is it cash basis.

[Tax Sleuth]

C Corp Balance Sheet continued

This is a complicated case. It is a cash basis business. After customers paid for services, deposits were made into the taxpayer's business account. There were never any appropriate interest rates and payments made on the "loan." The accountant appears to have used the Loans from shareholders line just as a way of balancing the balance sheet. No loan ever really existed. As I said before, he always increased the positive amount on the Loans from shareholders line to make up for the difference for the loss on the retained earnings line. I'm not saying the way he did it was the correct way. I'm just trying to figure out how to deal with this situation now. It is too late to structure a loan properly because this went on for many years and not taking this case is not an option for me. How should I deal with this situation?

[Uncle Sam]

If the loan never existed, then why not back out the amounts to show what the actual negative retained earnings is?

And anyway, in order to bring R/E to -0- there should be a negative balance in the Officer Loan Payable account, unless the owner initially loaned the corporation a substantial amount of money.

[ttbtaxes]

I would take the prior year balance sheet balances on the tax return and reconcile every item on the balance sheet to something:

Does cash reconcile to the bank?
Does Accounts receivable equal an outstanding list?
Do the fixed assets agree with a depreciation schedule?
Do Accounts payable and other current liabilities reconcile?
Do the balances of loans agree with a bank loan schedule?
Does the shareholder note payable agree to amounts actually deposited by the shareholder?
Etc...

Any adjustments to these accounts get posted to the Retained Earnings account.

Once you do that, you know the starting balances are now solid and tie out to some schedule. Then post this years transactions to the reconciled opening balances making sure you know exactly where all deposits came from (sales, bank loan, shareholder, loan, refund, etc..) and where all disbursements (expenses, payment of debt, purchase of assets, etc) went to.

You should not have to "plug" any current transactions.