Balance Sheet

[erchess]

Taxpayer is an Scorp that actually had no income and therefore no tax deductible expenses in 2006 but of course has to do a return because it had filed its incorporation papers and legally existed. Bank Balance on day of Incorporation was 275 and end of year was 400. Inventory at end of year was 2300 and at the end of the year buildings and other fixed assets were valued at $900. At the end of the year the business owed $2000. More correctly the owners had charged that much on their personal credit cards to buy things for the business.

That was all information I got from my clients. I cleared diagnostics in Ultratax by declaring that additional paid in capital at the beginning of the year was 275 and at the end of the year was 1600. All I know about Accounting is that Owner's Equity is equal to assets minus liabilities. (They are going to hire a bookkeeper who will do balance sheets per books and other financial statements for 2007, but all I had to work with for this year was oral discussions with the owners and one employee.)

From what is here have I managed to get the balance sheet correct?

Also, the company does business only in NC at this point and all owners except one reside in NC. The other owner lives in PA. Is a PA return required? My thought is no and my software company concurs but I thought at one point that the software was suggesting that I do one.

[Golden Rocket]

Bookkeeping

Income for the year should be as follows:

(1) Owner's equity at end of year (assets - liabilities)

MINUS

(2) Owner's equity at beginning of year (assets - liabilities)

ADJUSTED FOR

(3) Owners' contributions and distributions during the year.

This is much oversimplified, but when you boil away the complications,
this is all you are left with.

If, as you say, they have no deductible expenses, is it because all the
expenses are "start-up" expenses? If so, the amount of these expenses
should be summarized into an asset account called "prepaid start-up
expenses." Such an account is called by several different names, but
I have called it what it really is. The start-up expenses are then
amortized (depreciated) over the appropriate number of months, and
the monthly charges then become deductible expenses.

[erchess]

I don't see how

this works with the limited information I have been able to pry out of them. They did not make any sales and they did not receive interest on the corporate checking account. In their minds they had no income and I have to agree. They did build a storage shed for $1800 but only about half of its area is full of stuff related to the business and the other half is personal stuff. They bought a bunch of inventory.

And btw the reason they had no deductible expenses is that they had as I see it no income. Correct me if I am wrong, but is it not the case that there can be no deductions in a year for which there is no income? That was a hard and fast rule where I started in this business. There certainly were expenses that cannot be anything but startup expenses but I was planning to show the inventory as startup expenses too.

[ED SMITH]

Why bother with the balance sheet. If its gross or assets are under $250,000 you don't have to Sch L or M1. On SCH B, item 9, check the Yes box. Unless the client has a good bookkeeper, the chances of getting a decent financials are pretty slim.

[winnie]

NC question

You would not need to file a corporate return for PA. You will need to give all shareholders their NC K-1, so they can properly report what they need to report on their individual tax returns. If your S corp has income in later years, the corp MAY need to pay NC tax for the PA shareholder.

WInnie in NC

[Luis Mopeo]

this works with the limited information I have been able to pry out of them. They did not make any sales and they did not receive interest on the corporate checking account. In their minds they had no income and I have to agree. They did build a storage shed for $1800 but only about half of its area is full of stuff related to the business and the other half is personal stuff. They bought a bunch of inventory.

And btw the reason they had no deductible expenses is that they had as I see it no income. Correct me if I am wrong, but is it not the case that there can be no deductions in a year for which there is no income? That was a hard and fast rule where I started in this business. There certainly were expenses that cannot be anything but startup expenses but I was planning to show the inventory as startup expenses too.

Having income is a strong indicator that a business has started, but just because a business doesn't have income doesn't mean the business hasn't started.

Court cases have cited the start date as something like "When operational capability is in place and the business begins to perform the functions for which it was created," or something like that.

Take a retail store for example. The business starts the moment the doors are opened for the big Grand Opening. That's not tied to income. They could sit there all day and not make a sale, but the business has started.

Also, depreciation of assets begins when the asset is "ready and available" for use in a specific business. That's the case whether the asset is being used or not.

[oceanlovin'ea]

I agree that a business can start and can operate without income, especially a service business. My nephew and a friend of his have been working for a contractor for a couple of years doing tile work. They decided that their employer was making all the money and they decided to start their own business. They had done a few side jobs so they thought they could do this. I haven't talked to him in a few months but I know that he is working for someone else again. They started their business but if they couldn't get any jobs, they would have no income but expenses.

Also startup expenses can be written off in the first year up to $5000 and the rest must be amortized.

Linda F

[erchess]

Ty Everyone

Ed Smith, are you possibly overlooking that this is an Scorp? I can't find a Schedule B in my software and the verbiage on the screen indicates that Schedule L is required instead of M1, M2. and M3 precisely because assets are under a quarter of a million dollars.

Winnie, a big thank you for confirming what my common sense told me.

As for when the business opened, here is more information. They sell and install water and air purification systems for homes and businesses. They did buy some units in 06 and gather the contact information of people willing to do the installation work as independent contractors on fairly short notice. Each contractor also works for their competitors and/or sells his or her own units so I truly believe we are on solid ground calling them contractors. Their advertisement in the phone book has not yet appeared and as of a week ago their sales force had not hit the phones. I am staying out of where they get the names and phone numbers of people to call. Their physical location is in a private home on a gravel road without so much as a sign to indicate their presence.

[oceanlovin'ea]

Bank account

I think another thing you can look at to determine start of business is if they opened a bank account in the name of the corporation. That would indicate they were starting the corporation business.

I have had clients who set up corporations but never opened bank account or did anything in the name of the corporation. They still acted as sole proprietors. These I filed a zero tax return and closed corporation.

Linda F

[erchess]

Bank Account and question

As of March 2007 there was no business bank account and an owner personally paid for my services by check.

I would still like to know whether (as I think) an S Corp always has to do a balance sheet of some sort and there is no such thing as Schedule B for an S Corp.

[oceanlovin'ea]

Schedule B

I have always done a Schedule B for any corporation return that I have done, whether C corp or S corp.

Linda F

[erchess]

Thank You Linda

I will look harder and possibly call my software company.

[dsi]

As of March 2007 there was no business bank account and an owner personally paid for my services by check.

I would still like to know whether (as I think) an S Corp always has to do a balance sheet of some sort and there is no such thing as Schedule B for an S Corp.

As long as the total assets are < $250,000, then the corp is not required to prepare a BS. However, I insist that my clients have a complete set of Financial Statements each year. It is very handy for tracking stock basis, debt basis, etc.

[Luis Mopeo]

As for when the business opened, here is more information. They sell and install water and air purification systems for homes and businesses. They did buy some units in 06 and gather the contact information of people willing to do the installation work as independent contractors on fairly short notice. Each contractor also works for their competitors and/or sells his or her own units so I truly believe we are on solid ground calling them contractors. Their advertisement in the phone book has not yet appeared and as of a week ago their sales force had not hit the phones. I am staying out of where they get the names and phone numbers of people to call. Their physical location is in a private home on a gravel road without so much as a sign to indicate their presence.

I'm not the one you'd have to convince, but if I was I'd say that the business has not yet started. It sounds like everything's in place, but if the salespeople haven't yet started selling, I don't believe the business has started. If everything's set and ready, I'd say the business start date is the moment there's sales activity (successful or not).

I disagree that opening a bank account has anything to do with establishing a business start date. It may help establish the moment when a separate entity comes into existence, but a business start date for purposes of allocating organization and start up costs depends on when the business starts performing the functions for which it was organized. A business is not organized to open a checking account.

Let's say you want to start a home construction business. On February 1 you incorporate and open a corporate checking account, but you don't have any trucks or tools or customers. You actually don't start constructing until October. Your business start date is October, not February.

[erchess]

Thank you everyone

The software company helped me find Schedule B and check the necessary box.

How do I insist that they have financial statements when I cannot prepare them even if the company gives me the necessary information? I would love for clients to have financial statements but I worked only one tax season for a company that could prepare those.