TurboTax and Book Retained Earning Off by 50% Meal and Entertainment

[Johnny2phd]

Hello. I can't seem to find a clear answer to this question from historical search. I am using TurboTax Business 2020 version and using WAVEApps for bookkeeping. My retained earning on book is exactly $559 lower than my TurboTax Retained earning amount. $559 is the 50% of nondeductible meals and entertainment for the 2020 tax year expense. Additionally, my book Profit & Loss shows a net profit that is $559 less than TurboTax net income (taxable income), which is also due to the 50% nondeductible meals and entertainment portion. I would greatly appreciate anyone who can guide me through a proper journal entry with debit coming from which account class (equity, liability, asset, etc.) and credit from which account class so that the book amount matches with TurboTax amount. If this is not the correct path, how would I make this adjustment in TurboTax so that it matches with my book? Please be specific on the TurboTax adjustment too if possible. Thank you in advance.

[tagteam]

Have you adjusted your cash account to begin with since TurboTax will most likely not subtract the non-deductible portion.

[Johnny2phd]

Yes all other accounts including cash accounts are in order from start of business and throughout the years.

[tagteam]

I meant on your balance sheet but perhaps I am misunderstanding the exact nature of the issue.

Your balance sheet is out of balance by $559, is that correct?

Just as an aside, I am not familiar with the Wave accounting software.

[Johnny2phd]

My TurboTax balance sheet is off by $559 (the nondeductible half of my meal expense) compare to my bookkeeping software balance sheet. Basically, if 100% of the meal expense is deductible, then my book and turboTax balance sheet, retained earning, etc. will be fully matched. However, since we can only deduct 50% of meal expenses for 2020 tax year, this is where my turbotax  showed $559 higher in net income, retained earning etc.

[tagteam]

What happens if you adjust your end of year cash account and RE by $559?

[Rick19744]

I believe you may be missing the M-1 for the book / tax difference in handling M&E?

[Johnny2phd]

Agreed! any help you can provide to handle the Meal & entertainment correction on M-1 would be grateful through TurboTax software. The guide on TurboTax support is not helpful. I heard that I may need to manually adjust on the M-1 form because TurboTax Q&A interface is weak on this area....?

[tagteam]

@Johnny2phd If you enter Forms Mode, you can pull up pages 3-5 of your 1120-S and scroll down to the M-1 Smart Worksheet.

[Rick19744]

Also keep in mind that the balance sheet on the tax return should agree to your overall books and records and is not a tax balance sheet.

So your balance sheet should reflect 100% deduction for M&E.

Adjusting for the M-1 should resolve this, but just wanted you to understand that your book income will not match the tax income and your M-1 is where this is reconciled.

[Johnny2phd]

Section M-1 worksheet does have the $559 adjustment in line 5c) Travel and entertainment which then showed $559 in "Total expenses on book not deducted on this return" line.

At the bottom of the M-1 section, the last line labeled as "The difference between line 28 and Schedule M-1, line 10" shows $559 in red, so the M-1 worksheet seems to be fill out correctly...….however TurboTax still show my retained earning and net income as not in balance. Not sure what I am doing wrong and how I would correct this. My goal is to get my TurboTax to match my accounting books in term of net income and retained earning.......unclear how to do this properly.

[Johnny2phd]

well......apparently the issue is resolve by itself! From my last post, everything was entered correctly yet TurboTax still showed a message that net income and retained earning not in balance no matter how many times I redo these two sections on TurboTax.

Well, I finally just clicked the radio button to review later and move onto the next section, I went through every section until the final review and error checking page, and behold.....my net income and retained earning are NOW "balance" all by itself according to TurboTax! I didn't do anything differently except ignoring TurboTax "not balanced" error message and just move on. Seems like a TurboTax error for not updating all subsequent worksheets and internal reviews during the entry and editing mode of the net income and retained earning sections? I wasted a lot of time and energy doubting my numbers when in fact the issue is slow updating on TurboTax software! Hope this help the next person facing similar TurboTax error message! Thank you all who replied and help me on this post.