1065 Schedule M-2

[diversion]

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?

[tagteam]

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.

[diversion]

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.  

[tagteam]

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@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.  

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Only the Code (L) and STMT will be shown on Line 20. The other information will be shown on the K-1 179 report.

[Mike9241]

is m-2 line 3the same as m-1 line 9? then the gain is included. 

[diversion]

No, the amounts are not the same.

[Rick19744]

A few comments:

• Sch M-2 line 3 should equal Sch M-1 line 1
• Since this sale should have been recorded on the books, and most likely was, I would expect this income to already be included in Sch M-2 line 3.
• Your key lines are
  • Sch M-1 line 1 and Sch M-2 line 3 should be equal
  • Sch M-1 line 9 should agree to the analysis of net income line 1 (the top of page 5 of form 1065)
  • Sch M-2 line 9 should agree with Sch L line 21
  • If some of the above don't agree, then you have an issue to address
• If you still have issues, provide some additional facts and hopefully we can work this out for you

[diversion]

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.  

[Rick19744]

Based on your additional comments:

• Your first comment indicate that the sale is not recorded somewhere
• If you need to add something to the Sch M-2 line 4, this tells me that you have not recorded the sale on your books and records?

[diversion]

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?

[Rick19744]

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.

[diversion]

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.

[eastend19]

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. 

https://proconnect.intuit.com/community/lacerte-tax-news-updates/discussion/why-is-the-amount-on-my-...

[eastend19]

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. 

[AliciaP1]

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:

1. Within your tax return, under the Federal Taxes tab click Balance Sheet
2. Continue to the Your Reconciliations and Balance Sheet screen
3. Click Edit for the Income Reconciliation and proceed until it is in balance
4. Repeat for the Captial Reconciliation
5. Click Edit for the Balance Sheet and remove any amounts you have entered for Partner Capital
6. Proceed entering/reviewing your return

@eastend19