Using TT Business for our 2022 partnership return. In 2022 we sold an asset that had a full 179 deduction from a prior year. This asset was already in TT, and the sale was then entered in the step-by-step section. The sale then appeared in the schedule M-1 income reconciliation and flowed to the K-1 as expected. However, it seems there should also be a corresponding increase to the capital accounts in schedule M-2. After all, the business turned a fully depreciated asset with zero book value into cash. Am I missing something? Should I just enter the sale proceeds on M-2 line 4 manually?
I don't think so, but I have a test return where the figures are actually all correct on the balance sheet in this scenario.
I will page @Rick19744 and believe he will provide input soon.
There may be a problem with the K-1 as well. The asset sale is summarized in the Partner's Disposition Report attached to the K-1, but line 20 (L) on the K-1 does not show the asset sale amount; there is no value shown there.
@diversion wrote:
The asset sale is summarized in the Partner's Disposition Report attached to the K-1, but line 20 (L) on the K-1 does not show the asset sale amount; there is no value shown there.
Only the Code (L) and STMT will be shown on Line 20. The other information will be shown on the K-1 179 report.
is m-2 line 3the same as m-1 line 9? then the gain is included.
A few comments:
Thank you for the reply. My observations:
* M-1 line 1, and M-2 line 3, differ by exactly the amount of the asset sale.
* The asset sale was entered through the Step-by-Step process. The asset was already there from 2021 with the prior 179 deduction. I handled the sale using the "Dispose of Business Property" section under the Income tab. Note the sale does show up in M-1 line 6a as "Disposition of Section 179 Assets" but is not accounted for in M-2.
M-1 line 9 does agree with page 5 line 1. If I manually enter the asset sale amount in M-2 line 4 then everything else is perfect. But without my action, M-2 does not account for this sale. I am happy to provide any other information or try any other suggested actions.
Based on your additional comments:
The sale is recorded in TT. As mentioned:
The asset sale was entered through the Step-by-Step process. The asset was already there from 2021 with the prior 179 deduction. I handled the sale using the "Dispose of Business Property" section under the Income tab. Note the sale does show up in M-1 line 6a as "Disposition of Section 179 Assets" but is not accounted for in M-2.
Is there somewhere else in TT to record such a sale?
While you may have entered it in TT correctly, the Sch M-2 and Sch L (balance sheet) are based on your external books and records.
So I don't know if you maintain your books and records in QuickBooks, excel, etc. but the tax return and your books and records are generally not the same; which is why there is the Sch M-1 which reflects numerous lines to accommodate differences between book and tax.
As stated previously, Sch M-2 line 3 and Sch M-1 line 1 should always agree; both of these amounts represent book income not tax income.
I am not in a Windows environment to be able to walk through the software, but I do know what the end result should be, and as indicated previously, your facts indicate that your book income does not reflect the sale of the asset.
Our book income does reflect the sale of the asset, and our book income also matches M-1 line 1. This company is not that big and all the TT data is entered manually. So we are left wondering why, within the realm of TT, a properly entered section 179 asset sale is not accounted for in the TT-generated M-2?
So TT picks up the sale properly in M-1 line 6 and in the K-1's, but ignores it in M-2. Last year we had PPP forgiveness shown on M-1 line 6 and it also showed up as part of M-2 line 3 without issue. Similar situation in that it results in an increase of the capital accounts.
We will make a manual adjustment on M-2 line 4 and move on.
I am having a similar issue. It looks like there were changes to 1065 in the past 2 years (see link below). Per form 1065 instructions, M2 Line 3 now equals M1 Line 9. This is causing my M2 to be incorrect and under report partner capital and thus my balance sheet is incorrect. I am under the impression that balance sheet is still per books. The previous posts regarding M2 Line 3 = M1 Line 1, M1 Line 9 = Analysis of NI, M2 Line 9 = Sch L Line 21 is no longer correct I believe. If you have book/tax differences, in my case caused by guaranteed payments and Section 179 recapture, M2 Line 3 will never equal M1 Line 1. I believe my only way to fix this is what you did, M2 Line 4 adjustment to reconcile the book/tax differences that are not actually there. I have no book/tax differences in the way we track depreciation or the way we book recapture. Historically I have never had an issue with this section in reconciling my books with BS/M1/M2.
To make matters more confusing. When TT runs error check it specifically says the following for M2 Line 3:
"Check the income/loss amount reported on Schedule M2. This amount should be the net income (loss) shown on the partnership books used in maintaining the partners tax basis capital accounts for purposes of Schedule K1"
By default TT is pulling M1 Line 9, but this error is saying I should be using M1 Line 1. Any help appreciated here.
No, it's not telling you to use M1 Line 1, it is telling you that your Capital Reconciliation section under the Balance Sheet section isn't in balance or is reporting different net income from the tax return. You should complete the Income Reconciliation section and the Capital Reconciliation sections before entering your Balance Sheet (or remove any Balance Sheet overrides for these line items once the specific schedules are in balance).
To do this in TurboTax Business you can follow these steps:
I understand that, but how can the balance sheet, which is per books on the tax return, ever be balanced if we are using partner capital now based on tax basis? Income is reconciled and fine. M1 Line 9 Income is LESS than M1 Line 1. If we are using M1 L9 on M2 L3 this will cause parters capital per return to be understated and thus balance sheet is understated and not correct.
Right now my tax books are correct but the return will not be correct without a positive adjustment to M2 on Line 4 like the person above.
The Capital Reconciliation section does not report capital on a tax basis but is comparing the balance sheet book balance of capital to your tax records. Basis is not calculated on a tax return nor on the books. It is a separate tracking system that most businesses provide details about to partners but is the partners' responsibility to track their own basis.
TurboTax calculates the capital balance based on book-to-tax differences that are entered for the current year. If you have records of something that has affected the capital account balance that is not reported in TurboTax, you can enter a different balance based on that. You need to go through the steps I listed to get TurboTax to carry the correct amounts to the forms instead of trying to override and reconcile the M-2 directly on the form.
"If you have records of something that has affected the capital account balance that is not reported in TurboTax..."
But the 179 sale is reported in TurboTax, and appears properly everywhere else. So why wouldn't it be reflected in the capital account as well? I liken this to handling PPP forgiveness last year. Both are money from nothing, and both automatically show up in M-1 line 6a. But while PPP forgiveness also flowed to the capital account in M-2, the 179 sale does not. Doesn't seem right.
Agreed. There is something wrong here. It all has to do with Section 179 recapture not being properly reported and flowing through to capital accounts. In my case I have both recapture and guaranteed payments. While M1 is fine the issue really is M2 and TT pulling out guaranteed payments AND section 179 recapture. As such this results in a huge decrease in capital accounts.
Section 179 deductions and recaptures do not affect partners' capital for the business. They are both straight pass-through transactions to the partners that are reported on each partner's personal tax return. Guaranteed payments should end up reducing partner capital by way of reduced net income for the year.
I am sorry but that is not correct. Section 179 DOES affect partners capital, especially now that M2 is on tax-basis. You cannot have section 179 deduction on schedule K1 and no corresponding adjustment for the recapture. That would result in capital accounts going negative eventually. I agree that mechanically both the deduction and recapture are handled at the individual level as there are aggregates for individuals across all business entities that are owned. But the way TT is handling this is NOT correct. I have opened this return in ProConnect and it properly adjusts M2 when there is an asset disposition with section 179 depreciation.
Sale of Section 179 asset is recorded in TT. Gain on Disposition of Section 179 Assets is logged in M1 6a for $XXX. It is then logged on M2 4a. This allows all numbers to tie in to balance sheet if your balance sheet is tax basis.
Hope this helps. TurboTax needs to fix this bug immediately. @AliciaP1 @diversion