Balance Sheet

[Bees Knees]

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.

IRS may allow you to file the corporate return without a balance sheet, but I wouldn’t recommend it.

The books have to balance. If you don’t balance the books in one year, they won’t be balanced the next year. Somebody eventually has to go back and fix it. As long as you will eventually need a balance sheet, you should have one prepared in the beginning while it is still easy to figure out.

As to not knowing how to do a balance sheet, I think that kinda should be a requirement before you attempt to do a corporation return. A Schedule C is one thing, but a corporation is another.

[ED SMITH]

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.

I don't know what software you are using but clearly this is not the case.
Look at a a copy form 1120-s, Sch B, line 9.

"Are the corporation total receipts ....for the tax year and its total assets .... LESS than $250,000? If "Yes" ......NOT required to complete schedules L and M-1."

So, if receipts and assets are under $250K you are not required to the Balance Sheet (Sch L) or the
Reconciliation (Sch M-1).

[ED SMITH]

...there is no such thing as Schedule B for an S Corp.

Please! You should read the Tax Book chapter on S-corps as well as the IRS instruction forms and not just rely on software that may be inadequate.
Schedule B is on page 2 of the 4 page 1120-S form.

[erchess]

Thank you Ed Smith

I did find Schedule B. CS Ultratax has no Schedule B page per se but various parts of it are scattered here and there throughout the 1120S. For example the box one checks to indicate that there is no balance sheet because assets are under a quarter of a million is at the top of Schedule L and is worded in a manner that confused me. I thought I was to check it if I was going to complete Schedule L so I checked it and made entries on Schedule L without raising a peep from diagnostics. And you're right, I should at least have read the TTB section or the relevant Pub before posting the question to which you recently responded.

[Golden Rocket]

The Old Ways

Erchess, please don't be offended, but I believe this is a classic case of over-reliance on software instead of a working knowledge of the tax form itself.

We have had discussions on this forum where the storefront firms have personnel preparing returns whose expertise and efficiency is felt to hinge on their ability to navigate TaxWise, TaxAct, ProSeries, etc. One's mental perception of taxation is best served if the 1040 and its schedules are committed to functional memory. This will enhance the ability to do tax preparation, tax planning, and answer clients' questions as well.

Those of us who have been around awhile remember when the only way to prepare a return was to pencil it in, add, subtract, multiply, etc. and at best have it typed for cosmetic appearance. We had no choice. This may sound like being an old, grizzled, veteran is to be preferred to a young, energetic, intelligent and creative tax preparer. That's not my intent, because none of this necessarily follows.

Just so I remain an accurate tax preparer, I do the pencil thing on a mock-form, calculate the final refund (payment), then enter on my software. Do I waste time? Some, but I'm surprisingly fast with the pencil. But in the long run I am a better preparer, I believe.

[erchess]

Golden,

I salute you for doing returns twice, but I am not willing to go that far. My firm in my area began to do returns on the computer the year I went to work for them. We had the option of doing returns on paper during the early part of the year and I preferred doing so. I still do amendments on paper if I did not prepare the original return.

Although some of you resist the idea, I insist with the client that they had no revenue during the year and that therefore they are not allowed to declare expenses. Even if there were income and expense, I could do the return. I have TTB and the IRS Pubs and Instructions as well as other resources. I do intend to take the most thorough course on corps and partnerships I can find this fall. It's always nice to learn more. It has been several years but I probably have 30 contact hours of instruction on corps and partnerships under my belt.

That leaves the Balance Sheet. One isn't required in any event for this return, and when the client has records as shoddy as this outfit, I hate to give the IRS an unnecessary number. I have taken Accounting 111 and 112 at the local Community College, and I got A's. I still don't think I have any business preparing financial statements for clients even though in NC I believe that I could. I would love to know how I might motivate the company to hire an Accountant or at least a book keeper. I feel certain that with the help of such an individual I could cope with the L and when necessary the M-forms. If I could not, I know a guy to whom I would refer them.

[Luis Mopeo]

Although some of you resist the idea, I insist with the client that they had no revenue during the year and that therefore they are not allowed to declare expenses.

I resist the idea of making up rules for convenience. There is no rule that says you have to have revenue to deduct expenses. That made-up rule might be an easy response, but in reality it simply doesn't exist.

You must have a reasonable expectation of making a profit. You must be engaged in the activity for purposes of making a profit. You must conduct the activity in a business-like manner. There are 17 other criteria for deducting business expenses. And not a single one of them says you have to have revenue to deduct expenses.

If your client starts a pet shop, incurs $50,000 in start up expenses, rents a storefront, hires employees, and pays for advertising for a big grand opening, but they don't sell a single thing, you're saying they can't deduct their expenses for business?

As for the balance sheet, yes, the rules say if you're below the $250,000 threshold, you don't have to report the balance sheet on the tax return. Lots of experienced tax folks have said it's a bad idea not to have a balance sheet. They're trying to keep you out of trouble.

What happens if the business becomes successful next year? Whoa. All of a sudden you have to produce a balance sheet. If you're having trouble with that now, think how much harder it will be next year when you have to start from ground zero. We've been through it. Try to learn from our mistakes.

One of the reasons why corporations are formed is for liability protection. One of the first things lawyers do if they smell a possible claim is to pierce the corporate veil. When their sniffers get going, the first thing they do is try to demonstrate that the finances were not separated between the shareholders and the corporation, and therefore the activities were personal, not corporate. We've been through it. Try to learn from our mistakes.

You're trying to put your client's mess of financial statements onto a tax return. We're all screaming like stuck pigs, "DON'T DO IT!" Once you prepare a tax return with the client's hamburger financials, you become responsible.

Your challenge is not the tax return. It's making your client produce corporate financial records. Sure, anyone can make a tax return spit out without any kind of coherent financial records, and can try to justify it. That doesn't make it a good idea.

I don't think your problem is so much understanding a balance sheet. Your problem is trying to take your client's messy information and trying to make it fit on the form. Job one is to get the client's corporate financial statements nailed down, not just to slap figures on a form and hope it goes away. It won't. It's harder to deal with shareholders than it is to crunch numbers. But you can bet that if you take the messed up financials and use bailing wire to prepare a return, the client isn't going to all of a sudden show up with pristine statements next year.

We've been through it. Learn from our mistakes. Require solid financial statements before you prepare an entity return, whether it's you who prepare them, or someone else. Don't just throw crud onto a return and hope for the best.

[Golden Rocket]

State Return

Erchess, I don't think you have the option of not filing a return. If your customer has formed an S corp, it is essential that they file an application to the Secretary of State to register their purpose and name.

In almost all states, the secretary of state provides a database shared with the state department of revenue. Their state will want to know why a franchise tax isn't prepared. Nearly all states impose two corporate taxes, although they may call them under different names. One of the taxes is a tax on profits. The other is a tax on business activity, including capital structure. The capital structure will involve a balance sheet, regardless of whether one is required for federal purposes or not.

I'm not sure this would happen in all states, but I had a customer who wanted so badly to be incorporated by January 1 that he called the secretary of state lf Alabama every day. The secretary responded by creating his corporation on December 30th. After thinking a return would not be necessary, about a year later I had to talk with the Revenue boys. They insisted a return was due, and although there was no profit, my client actually had to send them a couple hundred dollars for the corporation's net worth (equity from the balance sheet).

And, of course, it follows that the states share data with the IRS, and vice-versa.

Bite the bullet with these guys. Tell them they started the timebomb ticking when they started the corporation.

[erchess]

One thing at a time

First of all, thanks to all of you who are trying to help me out. I do seem to be the person in this tread with the most to learn about SCorp returns.

Rocket, I completely agree that a return must be filed for Federal and NC. I believe that the term for the kind of return I am preparing for them is a "no economic activity" return. However, most of you seem to disagree with that course of action.

Luis, I would agree that you won't find the "no revenue therefore no expenses" rule written anywhere but I was taught it by people who knew more about corps and in particular dealing with audits than I do. Whether they know as much as you do, I couldn't say. However, let's see if the question is really relevant to this return. In O6 my clients made up a business plan in their heads, opened a business bank account and put money into it, incorporated the business with the state of NC, filed the paperwork with the IRS to make the S election, bought some inventory, and bought a storage shed. At least some of the payments for inventory and storage shed were made with personal credit cards. At least half of the stuff in the storage shed is personal property unrelated to the business. Now does that sound to you or to anyone else like they began doing business in 06? I remember only one opinion above that opening a bank account might do it, but that opinion seemed to gather little support. I recall an argument that a store which has opened its doors could consider itself open for business, but my guys are going to sell over the phone and their call center was scheduled to open the last week in August of 07. I guess it did but that is irrelevant to their 06 return.

Unless they are lying to me, the business took in nothing of value in 06 other than nontaxable contributions of capital by the owners.

I had not thought of the corporate shield getting pierced due to commingling of funds but I will warn them in writing about that.

If they do not hire a book keeper or accountant and do some decent financial statements, their return for next year will not be my problem. I have given them until December.

[Snaggletoof]

Financial Statements

When I started out, I was well-trained in the field of GAAP, and not trained at all in the field of taxes. I could do a balance sheet in my sleep, but could not do an 1120. Maybe I could be described as an erchess in reverse.

I marketed myself as someone who could provide accounting/bookkeeping/payroll services, but would have to turn my customers over to someone else to do their taxes. After less than a year, I found out all of my potential customers wanted someone who could do the whole thing, so I had to learn how to prepare taxes.

By the way, Luis Mopeo is the former IRS Chief, Division of Audits. It is a very remote possibility that your teachers know more than him. We are priveleged to have him on our forum. He is probably laughing in his beer...

Seriously, I made up the thing about Mopeo being IRS. But from his posts, he always seems to give sound, broadbased advice. Additionally, I have filed a few returns with zero revenue as long as I determined they were a bona fide business.

[Bees Knees]

Luis, I would agree that you won't find the "no revenue therefore no expenses" rule written anywhere but I was taught it by people who knew more about corps and in particular dealing with audits than I do. .... At least half of the stuff in the storage shed is personal property unrelated to the business. Now does that sound to you or to anyone else like they began doing business in 06?

Using corporate assets to store personal property, and the "no revenue therefore no expenses" rule are two different issues.

As it relates to a mail order business, the doors are open for business the moment they have advertised and are capable of taking orders, regardless of whether or not they made any money.

If they were not capable of taking orders in 2006 because they had no phone system in place to take orders, then 2006 is a start up year.

[erchess]

Actually the phone system is for calling

potential customers. I am not sure how they were going to manage the legality of that and I stayed out of it. Also, starting in the fall of 07 they will have telephone book placement and billboards. In light of what Bees said it sounds to me as if I am right about their not being in business in 06 but I will still read anything anyone wants to say to the contrary.

Now that leaves me with the issue of whether to do a balance sheet. We all agree that I don't legally have to do one. The firm where I learned this business always insisted on doing one, and for once there seems to be a majority opinion here that agrees with what I have always been taught. So be it, I will get help locally with the balance sheet and will do one on the return.

I just noticed that the initials of balance sheet are b s. I hope that is not an omen.