Help with Balance Sheet

[Peter Amico]

Hi all- 

I have a fairly simple tax return for an S corp (1120-S), but I cannot figure out the balance sheet. Here are the basics. This (2021) is the first year in existence for the org. 

Income

-159k ordinary business income

-3.5k short term cap gain

-162.5 total income. 

No shareholder distributions

Assets

-34k end of year cash

-500k other investments (value of partnership buy in)

-534 total assets

Liabilities and Shareholder Equity

-350k Loan (paid down from 500k)

-$25 capital stock

-162.5K Retained earnings

-512,525 Total Liabilities and Shareholder Equity

Short 21,475

Two other relevant factors: 

1) Paid down the loan balance by 150k this year. Should that be treated as retained earnings? 

2) The capital gain (3.5k) on sale of shares also returned capital (~22k) which was then paid toward the loan balance. 

My question

1) Should retained earnings reflect what was paid for the loan? In other words, should I add the 22k of returned capital from the sale of shares that was paid towards the loan to my retained earnings? That is the missing piece in the balance sheet. Is that additional paid in capital? Not sure where that should go. 

2) Also, should retained earnings reflect what was paid towards the loan that is no longer in cash? It went towards paying down the loan. 

[tagteam]

You did not list your expenses, but I get an OOB figure of $3,500, which is the exact amount of your short-term capital gain (which is a shareholder pro rata item, so that might be a factor here).

@Rick19744 

[Rick19744]

@tagteam I got the same OOB the first time looking at this, but I was using $25,000 in capital stock, but in rereading the facts, the amount is only $25.

A couple of questions:

• The balance sheet should be reported based on your books and records; not how the tax return presents the income and expenses.  As a result, where are you reporting the $3,500 in gain?
• Who carries the loan?
  • Is there interest expense being charged?
  • If "yes" (which should be the answer), where is this being reflected?
• Paying down the loan will only impact RE for any interest expense component.
• How are you maintaining your books and records?
  • Software package?
  • If using some software, due to the nature of accounting, you will always need a balancing journal entry for the debits and credits.  As a result, you should always be in balance.
• Don't understand the gain on the sale of shares.  The facts make it sound as if you sold stock in your S corporation?  Please expand on this transaction.

[tagteam]

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@Rick19744 wrote:

@tagteam I got the same OOB the first time looking at this, but I was using $25,000 in capital stock, but in rereading the facts, the amount is only $25.

---

Yes, I read that as $25,000, so thanks @Rick19744. The $25 figure is a bit odd in and of itself.

[Mike9241]

your math is bad or you made an error or left something out

cash = cash out to pay bank loan -150k

             cash put in for stock 25k

             cash  net profit 162.5

            net  should be 37.5K

liabilities and equity  loan 350K

                                       stock 25K

                           net income  162.5

total   $537.5

assets cash 37.5k

partnership 500k

total 537.5 

oh by the way you're not done with the s-corp the partnership will likely issue the s-corp  a k-1 which will have to be reflected on the return and to keep thinks logical reflected on the books

also, you'll need to track your tax basis. turbotax doesn't do it.  the bank loan would not be part of your basis 

so as of right now, I would say your tax basis is the $25K for the stock and the $162.5 of net income.  the reason I  say this is because should the partnership report a loss of $200K you can only use $187.5K when reporting on your 1040.   also did you take a salary? not taking a salary when you perform services for the S-Corp can be a red flag for IRS audit. 

[Peter Amico]

Ok, few more relevant details. 

-Total revenue (non Cap gain) was 250k minus expenses of 91k (included interest on the loan). 

-Cap gain was from selling shares in the partnership, not the S corp. We own 1.4 percent of the partnership and sold a small portion to a new partner who was buying in. So total proceeds were 25.5k (3.5 of which was CG). 

-Capital stock was 25 dollars because that is what we put in initially to open the bank account.  I know its weird, but that's all we put in. 

[Peter Amico]

The loan was not cash, it was paid directly to the partnership to buy shares. 

[Mike9241]

how did the cash get in the S-corp to buy the partnership?

and if paid directly by you to the partnership that leaves open the question pf who actually owns the partnership you or the corp. 

[Peter Amico]

The loan was from the bank to the S corp, but went directly to the partnership to buy the shares. 

[DanielV01]

@Peter Amico  Here's a question:  when you say you paid down $150K of the loan, is that $150K on principal only, or is it mixed between principal and interest?  Because if the payments were a combination, then you are reflecting a "double-dip" on your books:  You've reduced your loan liability by including your interest paid amount, when you have already included that same amount is already reflected as your "retained earnings".  That is where I'm suspecting your balance issue could be coming from.  

[Peter Amico]

Nope, not double dipping. Here are close to actual numbers. -47-6-2.5-151

~245k cash came in (30k from stock sale (3.5 was cap gain), 215k from services)

- Expenses 

Wages, payroll tax, 401k, health insurance- 47k

Interest on loan - 6k

Other expenses- 2.5k 

Principal paydown- 151k

Net cash - 38.5k (this is equal to cash end of year). 

[Rick19744 · Accepted solution]

After sifting through all the responses, I believe the answer lies in that you have not recorded the sale of the partnership units correctly.  Since you indicate approx $22,000, I believe this is throwing off the ability to correctly balance based on your facts.

When the S corp sold some of their interest in the partnership, there should have been an entry to the investment account; you no longer have $500,000 investment in that partnership.  This is what is causing you to be out of balance.

Sale of part of your partnership investment entry:

Dr. Cash

Cr. Gain on sale

Cr. Investment in partnership

In my mind, you have not recorded this correctly as your investment account should no longer be the $500,000.  After adjusting for this sale, you should be in balance.

[Peter Amico]

Thank you @Rick19744 ! Thats it. 

[Rick19744]

You are welcome.