, Answering FAQ'sTurboTax Employee
Your business is required to complete a balance sheet if at least one of these apply:
- Total income (before deductions) exceeds $250,000;
- Corporation year-end assets exceed $250,000;
- Partnership or LLC year-end assets exceed $1,000,000;
- Your business is filing a return in Alabama, Connecticut (except partnerships), District of Columbia, Georgia, Kentucky, Louisiana, Massachusetts, Mississippi, New Jersey (except partnerships), New York, North Carolina, Oklahoma, Pennsylvania, South Carolina, or Tennessee.
If your business doesn't fit any of the above, you can skip the Balance Sheet section.
What is a balance sheet?
The balance sheet is a "snapshot" of the business's finances at a particular point in time. It lists the dollar amounts of the company's asset, liability, and equity accounts. The total asset amount must equal the sum of the liability and equity amounts – hence the name balance sheet.
- Assets are resources owned by the business that are used to produce income, such as:
- Buildings and land
- Accounts receivable (money owed by customers)
- Intangible assets such as copyrights, patents, and goodwill
- Liabilities are best described as a business's obligations, for example:
- Salaries or wages owed to employees
- Taxes owed
- Accounts payable (amounts owed to others for credit purchases)
- Equity is the net value the owner(s) of the business have in the assets of the company. It consists of:
- Contributed capital, which is money contributed to the business by investors purchasing stock; and
- Net income, which is the business's income after deductions.
How does TurboTax Business handle balance sheets?
Very easily! The TurboTax Business Step-by-Step interview walks you through your balance sheet, and automatically puts the information you entered onto the correct tax form or worksheet. Here are more details:
Schedule L: Balance Sheets per Books
TurboTax Business provides a complete Interview allowing entry of all assets, liability and equity accounts, and supplemental worksheets for Other Assets and Other Liabilities. Together these make up Schedule L.
Schedule M-1: Reconciliation of Income (Loss) per Books With Income (Loss) per Return
For Form 1065 (Partnership) or Form 1120S (S corporation) returns, TurboTax Business provides a Schedule M-1 Items Worksheet.
For Form 1120 (Corporation) returns, TurboTax Business provides a Book/Return Income (Loss) Reconciliation Worksheet.
Schedule M-2: Analysis of Partners' Capital Accounts/Retained Earnings
For Form 1065 (Partnership) returns TurboTax Business provides a Schedule M-2: Analysis of Partners' Capital Accounts section on Form 1065, pp. 44-45.
For Form 1120 (Corporation) returns, TurboTax Business provides a Schedule M-2: Analysis of Unappropriated Retained Earnings per Books section on Form 1120, pp. 3-4.
For 1120S (S corporation) returns, TurboTax Business provides a Schedule M-2: Retained Earnings Worksheet on Form 1120S, page 4.
How do I correct my balance sheet in TurboTax?
If the income or earnings you entered differ from what's on your books, TurboTax Business will display a Not Reconciled screen. Here's how to go back and review your balance sheet amounts:
In TurboTax, click the Federal Taxes tab, and then click Balance Sheet right below it.
- You should now be on the Your Balance Sheet summary screen.
- Click Edit or Start to update existing accounts or enter new ones, respectively. Make sure your entries match the amounts in your books.
Should you continue to encounter problems, continue to the sections below for help and advice.
What are book-to-tax differences?
A balance sheet is balanced when Assets = Liabilities + Equity. Sounds simple enough, but wait ... there's more, at least when it comes to income taxes.
Most companies use Generally Accepted Accounting Principles (also known as GAAP) to record accounting transactions and prepare financial statements. On the other hand, tax accounting principles are used to prepare tax returns for the IRS. The differences between the two can create differences between the assets and liabilities on your books versus the information you report on your tax return. These are called book-to-tax differences and they must be resolved before your tax return's balance sheet will balance out.
Below are some of the more common reasons the amounts in your tax return may differ from your books.
Tax exempt interest recorded on the books.
Life insurance proceeds are generally not taxable if the corporation is the beneficiary.
Gain (Loss) on disposition of Section 179 Assets – Per IRS regulation, all Section 179 activity is passed to partners or shareholders.
Unearned rent income – Prepaid rent might be reported as income when received for tax purposes, but not recorded on your books until it's actually due.
Unearned income – Payments might be recognized as income when received for tax purposes, but for accounting purposes that income might not be recorded until the goods are delivered.
Gain on sale of assets might differ because depreciation differs between book and tax.
Disallowed meals and entertainment – Generally you can only deduct 50% of business meal and entertainment expense.
Fines and penalties are not deductible for tax purposes, but may have been deducted on your books.
Life Insurance Premiums – If your business has the right to receive proceeds from the policy, premium payments are not deductible.
Section 179 depreciation claimed as a tax deduction might not be claimed as a book expense.
Payroll taxes for employer Social Security tax on certain employee tips.
Loss on sale of assets might differ because of depreciation differences between book and tax.
Business costs that might be deducted for book purposes but amortized for tax purposes.
Bad debt expense that is charged off for tax purposes.
How do I reconcile my balance sheet in TurboTax?
Here are tips for correcting the balance sheet on your tax return.
Check that all amounts were entered correctly into TurboTax Business. Double check for transposition errors (e.g., entering 45 when you meant to enter 54).
Positive or negative? All amounts should be entered as positive unless your balance sheet balance has an uncharacteristic negative balance, for example a cash overdraft or an overpaid amount on an account payable. If you paid an amount on an account payable that was more than the invoice, you might have a negative amount in your liabilities. Or, previous losses in your retained earnings larger than any profit would be entered as negative retained earnings.
Last but not least, make sure your previously prepared balance sheet is in balance! Check for bookkeeping errors, and make sure that Assets = Liabilities + Equity. If you have a prepared balance sheet from your records, the amounts entered in TurboTax Business should not be different than those on the prepared record. Book profit or loss for the period should be added to retained earnings.
If you imported your balance sheet data from QuickBooks, confirm that all amounts imported correctly and that no information is duplicated or missing. If necessary, adjust balances.
Note: Depreciation does not import from QuickBooks. Oftentimes tax depreciation (as computed by TurboTax Business) is booked to QuickBooks by the business.
To see what's on a particular line (or to correct it), you can view or adjust the line item in Forms mode.
Creating a new balance sheet for your tax return?
Note: You may need professional guidance to recreate a prior- or current-year balance sheet if your business's records are incomplete or missing.
Beginning balances are found on your previous year's tax return as ending balances. Beginning with previous year's balances, add or subtract business activity to reflect current year's ending balances.
Prepare a cash flow statement that accurately reflects increases and decreases to balance sheet accounts.
Make sure all assets are listed at their basis (or book balance) amount. Beginning and ending inventory flow from the appropriate lines of the Cost of Goods Sold section of Schedule A.
Appropriate records must be kept supporting accumulated depreciation (i.e. depreciation claimed in prior years) on depreciable assets. Previous years' accumulated depreciation plus current year's depreciation expense are added together to get the ending accumulated depreciation amount.
Retained earnings amounts should include current year's book income or loss.
Troubleshooting balance sheet issues
If you tried to reconcile, but find your balance sheet is still out of balance, try one or all of the following:
Prepare a cash flow statement
Some businesses do not use a double-entry form of bookkeeping, relying instead on entries in a check register or other records. This practice may prevent you from preparing an accurate balance sheet for your tax return. Prepare a cash flow statement and reconcile it with your actual cash flow (checking account records, petty cash, etc.). Here's how:
- Start with the actual total balance of checking accounts, savings accounts, petty cash, etc. and any un-deposited funds at the beginning of the year.
- Add cash:
- Receipts for sales or service
- Cash contributed by shareholders/partners
- Collections on accounts receivable
- Receipts for sales of assets
- Interest and dividend income received
- Borrowed money
- Any other receipts, such as loans repaid, refunds, etc.
- Subtract cash:
- All expenses (be sure to include any automatic bank charges)
- Any shareholder/partner expenses paid with business funds
- Distributions to shareholders/partners
- Payments on loans or accounts payable
- Asset purchases
- The result should be the actual total balance of checking accounts, savings accounts, petty cash, etc. and any un-deposited funds at the end of the year.
Check all of your book entries and look for common bookkeeping errors such as:
- Transposed numbers (e.g., entering 45 as 54) or incorrectly entered numbers
- Entering the check number as the amount
- Changing the "sign" of an entry (entering a positive as a negative, or vice versa)
- Making incomplete or no journal entries to correct mistakes or non-cash transactions
- Not accurately reconciling bank statements
Confirm that you are not missing records. To prevent missing records:
- Establish and maintain an adequate record keeping system.
- Do not allow shareholders/partners to make personal payments from business accounts or business payments from personal accounts.
Check accuracy of account balances by reconciling or tracking the activity in each account from the balance at the beginning of the year to the balance at the end of the year.
Check prior-year balance sheets for accuracy. If your books were previously out of balance, they will remain out of balance until you correct them. If you discover a prior-year discrepancy, you do not need to file an amended return unless the mistake causes income, expense, or credit amounts to change. Other adjustments should be reported on a statement and attached to your current-year return.