Balance Sheet for 1120S

[peggysioux]

Question regarding sole proprietor changing over to S-Corp. Taxpayer changed to S-Corp under section 351 transferring assets for 100% of stock using cash basis. Taxpayer transferred the following into the S-Corp:

Assets:

Cash $117,287
Adj. Basis of Assets $ 67,363

Total Assets $184,650

Liabilities $173,780

Deferred Gain $10,870 (Capital Stock)

Total Liabilities & Equity $184,650

My question is this:

If the assets on the balance sheet should be "book", and not tax value, (assets book value is $193,295 (due to client 179'ing several assets in 2003) versus the adj. basis of $67,363, where do you make the adjustment on beginning balance of balance sheet for that difference. Please be patient with my ignorance and help me see the light!!!!!

[Uncle Sam]

Balance Sheet for 1120S

The non-cash assets should be recorded at the lower of cost or FMV.
Since FMV is less in this case, then you use FMV. You've got it correct already.

[OldJack]

My question is this:

If the assets on the balance sheet should be "book", and not tax value, (assets book value is $193,295 (due to client 179'ing several assets in 2003) versus the adj. basis of $67,363, where do you make the adjustment on beginning balance of balance sheet for that difference. Please be patient with my ignorance and help me see the light!!!!!

I agree that your total for capital stock is correct. However, I would show the fixed assets as cost of $193,295 with accumulated depreciation of $125,932 for a net book value of $67,363. Thus, you can simply continue to use your 1040 Sch-C depreciation schedule that has the same numbers. Also, it is much easier to determine numbers when the S-corp disposes of the assets.

[peggysioux]

The book value

that I refer to of $193,295 is original cost of $272,741 less accum. dep. of $79,446 based on SL versus the tax value at MACRS and 179 deductions. I have gotten myself totally confused. But I thought, the balance sheet should show book which would be Straight Line and an adjustment is made on the M-1 to account for the difference between book and tax; however I am unclear how to adjust for the beginning balance. Thanks for your help - I need it spelled out for me!!

[peggysioux]

Any help would

be greatly appreciated on clearing up my situation on book vs tax adjustment for beginning balance of S-Corp. Is it better to just go with tax basis rather than book basis on balance sheet??

[OldJack]

Yes as you say...Financial Statements are usually on the book basis (Cost $272,741-Accum Depr 79,446=$193,295 net asset) with the tax return showing book basis financial statement on page 4 and reconcilation on Schedule M-1. Sorry my numbers were wrong as I had assumed the original cost incorrectly. Therefore your Assets on the financial statement (117,287+193,295=310,582) and the capital contributed (310,582-173,780=136,802) should be more than your original post.

[peggysioux]

My confusion stems

from what I have found in my research states that my capital stock should reflect -- the stock basis equals the basis of property transferred less liabilities assumed by corporation, which is where I came up with the $10,870. So is my capital stock on page four of the 1120S to reflect the $10870? If I raise my assets to book basis then I need to raise my capital stock or something else in the liability/equity section or I don't balance. I am still confused.

[theresa d]

GAAP vs Tax Basis

If the financial statements were being prepared according to GAAP then there would be a book and tax difference which is reconciled on schedule M-1. However if the balance sheet is only being prepared for the tax return (and on a basis other than GAAP if the client needs financial statements prepared for some reason) i would prepare it on a tax basis. it would make recording keeping a lot easier. Do most of you prepare Schedule L on a tax basis?

[peggysioux]

If I used book basis, how is

the initial difference shown between book and tax basis. Please see my breakdown in first thread. That balance sheet is based on tax basis; For example, my balance sheet represents 1/1/05 balance and I know the tax program will adjust for difference between book and tax basis for depreciation for the end of the 2005 year; but I am still confused regarding the intital set up/balance sheet. I hope I am explaining my question so that it is clear to you all. Thank you for your input.

[OldJack]

If the financial statements were being prepared according to GAAP then there would be a book and tax difference which is reconciled on schedule M-1. However if the balance sheet is only being prepared for the tax return (and on a basis other than GAAP if the client needs financial statements prepared for some reason) i would prepare it on a tax basis. it would make recording keeping a lot easier. Do most of you prepare Schedule L on a tax basis?

I feel it should be required to prepare schedule L regardless of the size of the numbers. If you don't calculate sch-L numbers then your tax return taxable income could be wrong and if you do sch-L numbers then why not document them in case someone else has to prepare the next years tax return.

I would point out that corporate tax returns are should be prepared with the same method of accounting as used for bookkeeping and financial statements.

Accounting Methods -
An accounting method is a set of rules used to determine when and how income and expenses are reported. Taxable income should be determined using the method of
accounting regularly used in keeping the corporation’s books and records.
In all cases, the method used must clearly show taxable income.

Generally, permissible methods include:
• Cash,
• Accrual, or
• Any other method authorized by the Internal Revenue Code.

[theresa d]

tax basis of accounting

I agree that a balance sheet should be prepared for all corporate clients on the clients basis of accounting- cash or accrual. cash basis is an other comprehensive basis of accounting (OCBOA) other than GAAP. Within the cash basis category the client can prepare their financial statements using the tax basis of accounting. Many small closely held corporations use this menthod. If so the balance sheet would be prepared using the depreciation deducted for tax purposes.

[OldJack]

I agree that a balance sheet should be prepared for all corporate clients on the clients basis of accounting- cash or accrual. cash basis is an other comprehensive basis of accounting (OCBOA) other than GAAP. Within the cash basis category the client can prepare their financial statements using the tax basis of accounting. Many small closely held corporations use this menthod. If so the balance sheet would be prepared using the depreciation deducted for tax purposes.

I agree with Theresa D's statement and contend that my previous post is still accurate for the proper recording of this issue of stock for taxpayer assets. I would question what is stated as "tax basis" in this case as it would appear that the §179 deduction has caused the item to not be properly recorded as an asset with offset accumulated depreciation. If that is the case the bookkeeping is in error and should be corrected.

Yes as you say...Financial Statements are usually on the book basis (Cost $272,741-Accum Depr 79,446=$193,295 net asset) with the tax return showing book basis financial statement on page 4 and reconciliation on Schedule M-1. Therefore your Assets on the financial statement (117,287+193,295=310,582) and the capital contributed (310,582-173,780=136,802) should be more than your original post.

[peggysioux]

Old Jack,

would you mind if I sent you a private message regarding balance sheet??

Thanks!