I have a single shareholder-employee S Corp. I am filing form 1120S using TurboTax Business desktop product. Form 1120S schedule L - balance sheet is out of balance by the amount of the non-deductible expense. I have entered non-deductible expense on line 16c of Sch K.
For Sch L - balance sheet, on the Assets side, I only have one entry on line 1 - Cash assets. I do not have any other assets. On the Liabilities and Shareholders' Equity side, I have entries on lines 22 - Capital Stock and 24 - Retained earnings. This line 24 - Retained Earnings is automatically calculated by TT Business by adding the Retained Earnings at the beginning of the tax year and the ordinary business income from 2021. I do have positive ordinary business income for 2021. Line 24 - retained earnings is not editable in TT Business. However, line 22 - Capital Stock is editable.
I am thinking that I need to reduce the Liabilities & Shareholders' Equity section of the balance sheet by the amount of the non-deductible expenses so that it will match the Assets side. Currently the Assets are more than the Liabilities and Shareholders' Equity by the amount of the non-deductible expenses. I wanted to reduce the Retained Earnings by the amount of the non-deductible expenses. But because the retained earnings line is not editable in TT Business, should I reduce the Capital Stock? Because ultimately, I think I need to reduce my stock basis in the S Corp by the amount of the non-deductible expenses and if stock basis cannot be reduced by reducing the retained earnings then, do I need to reduce the capital stock? Is the non-deductible expense an appropriate reason to reduce the capital stock?
Can you help with this situation please? How are non-deductible expenses accounted for on the balance sheet?
Second related question I have is about reconciling the retained earnings on Sch L - balance sheet against the Sch M-2 Adjusted Accumulated Account balance at the end of the year. Since I have entered non-deductible expenses on line 16c in Sch K - these are automatically brought onto Sch M-2 by TT Business. Sch M-2 line 8 is already reduced by the amount of the non-deductible expense by TT Business (subtracted from the ordinary income). Because sch M-2 line 8 is already reduced by the non-deductible expense amount, do I need to match that end of the year balance of the AAA with the end of the year retained earnings on Sch L - balance sheet? As noted above, I am not able to reduce the retained earnings calculated by TT Business. What is the solution here? What is the correct way to look at Sch L and Sch M-2?
retained earnings on schedule L should be net of non deductible expenses.
m-2 line 5 should reflect this expense as should m-1 line 3
in theory, if you have always been an S-corp, and haven't made distributions in excess of the AAA a/c, the AAA a/c and retained earnings should be the same.
AAA a/c is the retained income of the S-corp as is retained earnings assuming nothing unusual has transpired like contributing property, being a C-corp, and other transactions that must have special treatment
my only guess is that there is a form that you must use to enter non-automatic nondeductible expenses. from there it flows to schedule k, the k-1's and all required places on page 5 of the tax return