Business is an LLC taxed as an S Corp (form 2553 check the box election). Since business is still legally an LLC, it does not have shareholders but rather members (owners). In QuickBooks, retained earnings (profit) after the first year of business were closed to owners/members equity via a journal entry after completing taxes (Debit to Retained Earnings, Credit to Owners Equity)- dated 1/1/2019 since an LLC should not have accumulated earnings. Additional background:
- Prior year tax return (1st year) was completed with original member equity as Capital Stock (Line 22 Schedule L 1120s column d) along with first year profits as Retained Earnings (Line 24 column d).
- Current year tax return follows suit with the prior year Capital Stock as the beginning balance (Line 22 column a)
- TurboTax business default import from QuickBooks shows retained earnings cumulative (last year profit plus current year profit) even though the prior year retained earnings was "reversed"/closed into owners equity
- Note that owner is paid a reasonable salary ($100k+) and the retained earnings from prior year were kept in the business to ensure cash flow available for the eventual need to hire employees (no distributions to owner/member beyond salary)
While completing current year tax returns (1120s, schedule L and M), a few questions:
- 1120S Schedule L: Column d:
- Line 22 (Capital Stock)--Should this be the original value plus the prior year Retained Earnings that were closed out into equity OR should prior year retained earnings that were credited to equity be referenced on Line 23 (Paid in Capital) OR should all equity be referenced on Line 23
- Essentially since it is an LLC, Stock/Paid in capital does not really exist but rather member/owners equity (square peg, round hole)
- Related to above, why does TurboTax not recognize the prior year Retained Earnings adjusting entry that closed it to owners equity in Line 24 column D (rather it is showing accumulated earnings vs. just current year)?
- Was journal entry closing retained earnings to members equity properly dated (1/1/19 vs. 12/31/2018)?
- Is Schedule M-2 actually required?
- Given business was never a C-corp it does not appear to be required.
- If it is required, any guidance on how this should be reflected? Is it supposed to show true accumulated earnings across years? If so, then this would not match retained earnings on Line 24 column D?
- Basis is relatively easy to track given single member (SMLLC) so it is initial investment plus the cumulative earnings and withdrawals/distributions
- Note it is known that in general Schedule M2 adjusts for book value vs. tax value (nondeductible meals, depreciation, etc that increase retained earnings/profit for tax related purposes which flow through to members schedule K1)
Thanks in advance for any help/guidance.
