Form 1120-S Schedule M-2 and schedule L questions

[drcgeri]

I was wondering if the final amount on line 8 of schedule M-2 should be equal to the ending balance in my bank account for the year. I’m also wondering if this is the figure that will need to match the starting value of next year’s tax return? For some reason, when line 8 of schedule M-2 is equal to my ending bank account balance, then the retained earnings at the end of the year on schedule L are not equal to my assets (bank balance plus inventory value). But if I adjust the figures so that my retained earnings on schedule L match up with my assets, then the amount in schedule M-2 line 8 is a few hundred dollars less than my ending bank balance. So that's why I'm wondering if that line is supposed to equal my bank balance and if this is the figure that the IRS will look at next year for my starting value or if that's something else. Thanks for any help!

[PatriciaV · Accepted solution]

Schedule M-2 is a reconciliation of your accumulated adjustments and other historical transactions. If this is the first year of your S-Corp, you should have no adjustments. The schedule should reflect income/loss and perhaps distributions. 

Note that Schedule M-1 and M-2 are required only if the corporation's gross receipts or its total assets at the end of the year are greater than $250,000.

Retained earnings would equal your total assets on Schedule L column (d) only if you have no liabilities, capital stock, paid-in capital or adjustments.  

See also: IRS: Instructions for Form 1120-S (2024)

[drcgeri]

@PatriciaV  Thank you so much for your helpful answer. I do need to fill out this schedule as my total receipts are greater than the cutoff. Just to clarify, though, should the amount I end up with on the final line of Schedule M-2 be equal to my ending bank balance? In other words, if it isn't equal do I need to figure out if something's wrong? And what figure from this year's return will the IRS be looking at to see if it matches up with my starting stock basis next year?

[PatriciaV]

It depends. The ending balance on M-2 doesn't really correspond to any particular line on the Balance Sheet. The change in Retained Earnings on the Balance Sheet should reconcile to the net income (loss) less distributions.

You'll file Form 7203 with your personal return to report your stock basis. The IRS is mostly concerned that the income allocated to you from the S-Corp is included on your personal return.