TurboTax Business Interview does NOT ask about Capital Contributions made by shareholders

[starting2makecents]

I have now completed an S-CORP tax return in TurboTax Business (i.e., the desktop software program), for tax years 2015, 2016 & 2017. Throughout this process, I have discovered that the software program DOES NOT ASK ABOUT, nor does it keep track of any Capital Contributions (i.e., increases, Paid-In-Capital) made by shareholders during the tax year as it should. By not asking about the Capital Contributions, the Stock and Loan Basis Information Worksheet is INCORRECT which in turn, makes the Shareholders' Basis Statement AND the Shareholders' Basis Report INVALID.

Now I am beginning to wonder if I made the correct choice in using TurboTax Business software to complete these S-Corporation tax returns...

If anyone out there has used TurboTax Business software to prepare your 1120 or 1120S tax return, I highly recommend that you recheck the shareholder basis that you have reported to the IRS as it may be incorrect, necessitating the need to amend your tax returns.

RESOLUTION

To resolve the issue above, it will be necessary for you to switch to Forms mode and manually enter the amount of Capital Contributions made by each shareholder on the Stock and Loan Basis Information Worksheet for each shareholder individually. This will automatically update the rest of the forms and the shareholder basis reported to the federal government (after you amend). 😲

[tagteam]

TurboTax Business contains four modules; 1120, 1120-S, 1065, and 1041.

As a result, the program is jam-packed with code and many operations are not included in the Step-by-Step process and, instead, have to be entered in Forms Mode.

Most professional tax preparation software is similarly forms-driven which requires familiarity with the entire income tax preparation process for a particular type of entity.

Regardless, thank you for pointing out entries for which users need Forms Mode.

[starting2makecents]

@tagteam, Thanks however, no one EXCEPT for Intuit/TurboTax Business should be responsible for pointing out entries for which users need to use Forms Mode. The shareholder section should make the user aware of the necessity when entering the other shareholder related information such as Shareholder Distributions AND Loan Repayments; both of which are clearly and correctly asked about during the interview. At minimum, there should be a link to the local help file which provides the necessary instructions to the user regarding Capital Contributions entry in Forms Mode.

[tagteam]

@starting2makecents 

I do not disagree, but then you must realize that the information to which you refer is not required of all users (see requirements for completing Schedule L).

Further, individual shareholders should be keeping track of their contributions and any other items that affect their bases outside of TurboTax.

[starting2makecents]

@tagteam, You are absolutely correct about Schedule L however; it is shareholder basis which is affected by the shareholder Capital Contributions that TurboTax did not ask about and here is why it matters. Shareholder basis is the determining factor as to whether or not losses can be deducted personally (in the case of an S-Corp). Programming TurboTax Business to ONLY ask about and document deductions to Shareholder Basis  (e.g., distributions, loan repayments from the corp.) compounds the problem with losses AND negatively affects all subsequent returns prepared with TurboTax Business. In other words, not being asked to enter the Capital Contributions during the interview, a user would erroneously leave out the Paid-in-Capital, subsequently reducing their Shareholder Stock Basis.

For example, an S-Corp in its first year of business (having no retained earnings) has a loss to report on the 1120S of $3,000 and the shareholder only has $3,000 in initial capital (i.e., stock basis) invested into the S-Corp. The loss would drain the shareholder of all stock basis in the company for the tax year, preventing the loss from becoming deductible personally however; during the same year the shareholder contributed $3,000 in Paid-in-Capital in order to restore his/her initial investment/stock basis. By doing so, the shareholder would be able to deduct the entire loss personally. If TurboTax Business NEVER ASKED about the Capital Contribution during the interview (which it doesn't), the shareholder may not know, or forget to go to forms mode and enter it manually. Then to magnify the situation, TurboTax Business would not have a complete picture of the shareholder's basis and as a result, transfer the error to all subsequent tax returns. Additionally, the information the corporation reports to the IRS does not match information that the shareholder reports on their personal tax return. FLAG!

Regarding the Schedule L, I (and the IRS) recommend that all corporations complete Schedule L from the beginning of incorporation in order to eliminate headaches down the road when you realize that you should have been completing the Schedule L all along.

[tagteam]

@starting2makecents 

I understand the need and rationale for shareholders to track their bases but, again, they need to do that outside of the TurboTax Business program.

You must be aware that many (if not most or even the vast majority) of shareholders in S corporations never see any document other than their K-1s (1120-S) and information related to their "capital accounts" does not appear on those K-1s (unlike K-1s issued by partnerships/multi-member LLCs).

We can argue about this for years, but the developers are most likely not going to add some sort of "basis calculation" for shareholders in Step-by-Step nor automate all of the entries that may be required to be made on the balance sheet (Schedule L). The program, after all, is intended for small S corporations and, in fact, there was even a disclaimer (somewhere and at some time) stating that the program "worked best for corporations with less than $250,000 in revenue and assets".

[starting2makecents]

@tagteam, The Schedule L and the shareholder basis calculation (for the purpose of TurboTax Business) are two very different things that you continually seem to be combining erroneously.

I am not trying to argue with you but I do believe you have a misunderstanding about all that I have stated. Your misunderstanding is evident in your statement "the developers are most likely not going to add some sort of "basis calculation" for shareholders nor automate all of the entries that may be required". FYI: The developers have already added the basis calculation in the form of the Stock and Loan Basis Information Worksheet AND the Shareholder's Basis Statement AND the Shareholders' Basis Report for each shareholder in the corporation's 1120S. The PROBLEM is that the shareholder Capital Contributions, is missing from the interview. The Capital Contributions are needed to complete the calculation accurately.

[tagteam]

@starting2makecents 

You are absolutely correct, except what do you call the entry in the worksheet in the screenshot below?

[starting2makecents]

@tagteam, I call that the line which SHOULD be alluded to in the TurboTax Interview along with all the other questions about basis affecting entries as discussed earlier however; as I have stated multiple times, the interview does NOT ask any questions which would populate that line of the Shareholder's Basis Statement...

[tagteam]

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@starting2makecents wrote:

......the interview does NOT ask any questions which would populate that line of the Shareholder's Basis Statement...

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The problem is everything cannot be in the interview as doing so would demand a huge amount of resources and would swallow up even large hard drives or SSDs.

I realize you believe this particular line should be included and is critical, but then other users also believe different lines, forms, and schedules in other modules should also be included and are just as critical. 

TurboTax Business has a myriad of tax scenarios that require Forms Mode and it is doubtful that will ever change, partly due to the constraints mentioned earlier and also due to the lack of demand for certain features.

A couple of examples can be seen in the 1041 module. For estates or trusts that need to prepare a Schedule C or F, that must be done entirely in Forms Mode. 

[roblaas]

I do not usually comment on these types of items, but I have to agree with @starting2makecents. Without the inclusion of even a direction to forms mode to enter contributions, not only will your ending retained earnings be incorrect (and carried forward from year to year incorrectly), but it may also cause the taxpayer to pay an erroneous additional amount of tax because, without the contributions added in, the distributions may show as having been more than your basis. I do agree that not every little thing can be included, but this is not a "little" thing. Quite the opposite. This is my second year to use Turbo Tax for a business return, but my first year dealing with contributions for that business. I just spent an hour and a half trying to get my retained earnings to calculate correctly before finding this set of posts. I could have done the entire return by hand in that time, which just makes me think I may have wasted my money and I might need to find a different software for 2022. 

[ifunlisted]

Absolutely agree with this. Obviously you can't create an interview that addresses every single scenario when it comes to corporate taxes (even for small companies), but Shareholder Basis is something all S Corps should be tracking... so why not add one question re Capital Contributions. That one simple addition, and having TurboTax automatically calculate Basis and plug it into the K-1 would be a tremendously useful feature.

[Jeffreystone1411]

I’ve come across this exact issue which is why I now get to spend my night filing amendments, it’s ridiculous that it was not apart of the step-by-step process nor noted in any way. And this guy arguing otherwise annoys me deeply. Get it together TurboTax.

[tagteam]

My argument is, essentially, based upon a comparison to other DIY business income tax preparation products and the primary component is simply that if users can find a better, more comprehensive DIY program, they should buy it. 

[EagleEye2828]

I concur with starting2makecents, I just messed up a tax return because I assumed it understood the ownership data I input into it combined with the Balance Sheet equity. My mistake of course, but something I assumed the software would flag me on. I have an angry accountant on my hands now and I'll have to amend. Cruddddd!