1120 - Federal Income Tax Expense HELP!!

[Lucy and Rainbow]

in 2023, we had Debit - $56,700 (Federal Income Tax Expense), Credit - $56,700 (Current Tax Liability) on my book.  As $56,700 was not deductible on 1120, it was not included in 1120 last year.  Thus, I did not include the liability in the balance sheet attached to 1120 last year (otherwise the balance sheet did not balance).  During 2024, I paid $56,700.  Thus, the cash balance went down by $56,700 in 2024.  Now, the balance sheet for 2024 1120 does not balance as cash balance went down by $56,700 but there is no other side of entries on balance sheet (for 1120). 

For clarification - all 3 financial statements work perfectly.  However, financial statements for tax return (1120) does not work, as while federal income tax is not expensed on income statement, it is still affecting cash balance on the balance sheet.   

[KeshaH]

The Schedule L is reported based on your books, not necessarily your tax return. (See Schedule L, in the instructions for Form 1120.)

Including the current tax liability on your balance sheet caused it to be out of balance because you didn't include your current tax expense in your retained earnings. Your retained earnings should still include your federal tax expense (as well as any other nondeductible/nontaxable items) so that it can match your books. Then when the payment is made, both cash and the liability go down so your balance sheet stays in balance. 

To fix this for the current year, you will need to reduce your retained earnings by the $56,700. To do this in TurboTax Desktop:

- Click the Forms icon in the top right corner to switch to forms mode.

- In the left navigation, click on Form 1120 and scroll to Schedule M-2.

- On line 6, Other decreases (itemize), enter "Prior period adjustment" and $56,700 on the first line. (see screenshot). Your retained earnings should adjust and your balance sheet should now be in balance.