S-corp AAA vs retained earnings in ATX

[joanmcq]

I'm doing an S-corp for the first time for a client who self-prepared from 2006-2011. There are some issues, but most that I can handle (although I've asked for the 2005-2007 returns to track basis since 2005 was the last professionally prepared year; I have 2008-11). Like many sole member shareholders, he's made substantial loans to the corp, & this year wants to do some APIC. I've already researched these issues.

BUT: the Turbo tax return from last year has in Sch M-2 a balance of (173,229). Retained earnings of (363,041).

ATX equals line 8 of the M-2 with retained earnings. I still haven't accounted for the $66096 of APIC and I'm over $100k out of balance. This is my only S-corp I'm doing that I'm not doing the books/return from inception.

Can anyone shed some light on what may be going on?

[jklcpa]

Here are just a couple of quick thoughts that came to mind -

Was this an S corp since inception? If not, the corp could have C corp earnings that aren't AAA.

Are the books and balance sheet on tax basis also, or are they GAAP?

Timing differences between book and tax?

I was also going to say distributions in excess of AAA in earlier years that could have reduced R.E. but would only reduce AAA to zero, but then R.E. would be lower than AAA.

Is last year's ending balance sheet actually in balance? TT could have been trying to automatically balance the balance sheet through a plug to R.E. Find out which figure matches last year's trial balance.

Is everything being reported properly on Sch K and the reconciliation of AAA in M-2. With ATX in prior years I seem to recall some items from Sch K weren't automatically flowing to the M-2 and had to be entered on the M-2 itself separately. IIRC, these were adjustment type items like nontaxable income, nondeductible expenses and distributions that would affect M-2, lines 3, 5 & 7. ATX would arrive at an AAA figure and put that on the line for retained earnings on the balance sheet causing it to be out of balance. Is your balance sheet in balance?

Can this client also provide a trial balance for each of these earlier years so you can pin this down?

[joanmcq]

It's been an S-corp from the start. I'm getting the returns I'm missing. The prior year's QB ties into the tax return, but I have a feeling it was done as an import. On none of the returns I have does the AAA tie to retained earnings, but I know there is an issue from back in 2008 since the AAA in that year was zero. I have a feeling TurboTax just started computing it based on that year's loss, and carried forward the bad numbers.

Since ATX computes RE from the AAA, I have a feeling I'll have to plug somewhere. AAA is negative too.

[jklcpa]

You'll need those back year returns to pin down what is going on with that AAA. I know that you already know this, but for those others reading here, the AAA could be negative if from prior year losses, but distributions can only take it down to zero and can't create negative AAA. Sorry that none of my ideas helped. Is this a calendar year return that you are trying to complete by the extended deadline on the 16th?

[joanmcq]

Yes, calendar year. Big ugh. There haven't been any distributions except for interest paid on the shareholder loans, and management fees. This has essentially been a holding company for the last few years: it provides property management services for his rentals. His QB is actually surprisingly good, but there have been big hiccups on the returns.

In 2013 he's starting a business that will also be run through the corp, so I want everything to be as tidy as I can make it. And I really hate plugs, but at this late date, I'll plug if I have to. The balance sheet isn't required for the return after all....

[michaelmars]

why not have the new business in a new entity and start clean!

[joanmcq]

Entities aren't free in CA, $800/ yr makes one think twice before piling up LLCs or corps.

[Catherine]

Yes, calendar year. Big ugh. There haven't been any distributions except for interest paid on the shareholder loans, and management fees. This has essentially been a holding company for the last few years: it provides property management services for his rentals. His QB is actually surprisingly good, but there have been big hiccups on the returns.

In 2013 he's starting a business that will also be run through the corp, so I want everything to be as tidy as I can make it. And I really hate plugs, but at this late date, I'll plug if I have to. The balance sheet isn't required for the return after all....

Plug if you need to -- but tell the folks that TTx made some prior-year errors you *will* need to fix going forward. Additional charge after 9/15 (heck, after 10/15 if you're busy) to get the numbers straight for next year. Next year the correction will read "adjustment for prior-year errors" on the balance sheet and your notes will be back-up.

I had some folks come to me a couple years ago with these same kinds of errors. How bad could it be, I thought (silly me!) after only 14 months (one short year return, one regular year return, done by CPA who must have been senile and then died before end of 2nd full year). It was absolutely and utterly wrong from Day 1 and it cost them more to fix the accounting disaster afterwards than it cost to do the return.

The good news was that day-to-day operations were OK. The bad news is that EVERY equity account was wrong. Assets, liabilities, equipment (mucked up state depreciation) , AAA, OAA, retained earnings -- all came from la-la land. Took me two years to get it really right. I think it's right. I hope and pray it's right. It's way "righter" than it was, at least. Let's just say I no longer want to lock myself in the front hall closet with a 14-oz bag of Skittles when they send their info in.

[jklcpa]

Catherine's idea is about what I'd do too. I hate the plugs, but nothing else you can do short of amending. Hopefully, the errors don't include this person deducting losses that shouldn't have been allowed due to basis limitations. At least the balance sheet isn't required.

If I had this, once I had all the returns and trial balances for the prior years, I'd go back and prepare a basis worksheet for each year too.

[joanmcq]

I'm going to start with 2005, the last year the corp was prepared professionally, and compute AAA over again. Last year for his personal return, I had to recompute NOLS, passive losses, AMT NOLs, credit carryforwards, capital loss carryforwards, and the same for CA. It was a mess and made my brain explode on more than one occasion.

Comparatively, this is much simpler, and his QB is pretty damned clean. As in - the one adjustment I made was removing penalties & interest from the state tax payments, and have him reclassify an amount in 'opening balance equity' as APIC (we had a discussion as to APIC vs. more shareholder loans). That is a blessing; last year I went over and over the QB until I was satisfied I could rely on the numbers.

I just hope he still has basis for taking losses.

[jklcpa]

Catherine's story sounds pretty bad. I'll tell a quick story of how it could be thought that I'd made mistakes like that if another preparer were to follow me on one particular client. This is one of my largest business clients, C corp, a retailer with multiple store locations, larger # of vendors, uses QuickBooks and has a full time bookkeeper. Bookkeeper is pretty good and calls me when she doesn't know how to post. This client gets a review financial statement because of large line of credit with the bank.

One thing bookkeeper & QuickBooks did that threw prior year numbers out of whack for a/p, retained earnings, several cost of sales accounts, and net income was the way she was entering vendor credits issued many months after year-end. Some of the company's vendors allow very generous terms where payments are spread over 6 months or more, and company always has purchases from these vendors just before their year end because of a large trade show held shortly before that date. The vendor credits occurred after I've completed my work and issued the statement and tax return, and the credits offset a portion of the unpaid balance on invoices for purchases prior to the year end I'd completed. The bookkeeper entered the invoice number to be offset and QuickBooks put that credit in the prior year because I believe that QB defaulted to the original invoice date when the original invoice number was used to enter the credit.

A year went by and I arrived to start the next year's review work. I pulled my hair out to find why the opening retained earnings in the company's general ledger no longer tied to the ending retained earnings in my workpapers for the prior year. Bookkeeper and I have resolved this, but once in a while something like this occurs in QuickBooks where a date might be input wrong when entering.

If another preparer had picked up this job and printed reports from the company's system, it would have definitely looked like I issued the report and tax return using incorrect figures.

I love the flexibility that QuickBooks allows, and in the right hands it can be a wonderful tool. Used incorrectly, or by someone inexperienced or not paying attention, it can create a lot of headaches.

[Catherine]

Yes QB has its own good points and headache spots.

The case I mentioned the guy split opening equity between the two owners and their two businesses -- when it was loans, not cash, from one shareholder's family members, to be repaid with interest, and split unequally between the two businesses. Plus two bank loans (one for each business) that he split both, equally, between the two.

It was a nightmare. Thanks heavens for hair dye, is all I can say.

[joanmcq]

Well I had to plug equity since ending AAA doesn't equal RE and ATX doesn't allow for a difference while TT does. Yucko. BUT I did calculate beginning AAA which brought the equity difference down to the increase in the shareholder loan and APIC for this year.

Or should those go into AAA as another increase? Doesn't seem right. I'm pretty fried at this point.

Got the basis straightened out too, and hallelujah! He has some basis remaining, so the losses on the individual returns were all ok.

But this is my last corp, and I'm going out with friends tonight. Sending this sucker out tomorrow and then....its back to the individuals..

[jklcpa]

Well I had to plug equity since ending AAA doesn't equal RE and ATX doesn't allow for a difference while TT does. Yucko. BUT I did calculate beginning AAA which brought the equity difference down to the increase in the shareholder loan and APIC for this year.

Or should those go into AAA as another increase? Doesn't seem right. I'm pretty fried at this point.

Got the basis straightened out too, and hallelujah! He has some basis remaining, so the losses on the individual returns were all ok.

But this is my last corp, and I'm going out with friends tonight. Sending this sucker out tomorrow and then....its back to the individuals..

The increase in shareholder loan and APIC doesn't affect the AAA at all, they only affect the shareholder's basis.

To be sure that I'm completely in balance, I always opened the "Options" tab in the 1120S form of ATX and checked the box to force completion of the balance sheet and M-1 so that I could view it on the screen, do my final review, sometimes would print pg 4 of the 1120S for my file, and then uncheck the box before filing.

Unless you are keeping the books on the tax basis of accounting and not GAAP, it is entirely possible, and not even unusual, to have a different AAA for tax than AAA per books because of temporary timing differences. Those are the same as for C corps (tax vs book deprec, bad debts, acc'd shareholder distribs, sec 263 inventory adjustments, accr'd shareholder salaries, accr'd vacation pay, cap lease amort and interest, rent adjustment under sec 267, and accumulated timing diffs from prior years that haven't yet reversed. Permanent differences arising from nontaxable income and nondeductible expenses are on Sch K and flow through to M-1 and M-2, and these do not cause differences in the AAA and retained earnings.

Joan, I think you are missing that ATX does have a worksheet to record the timing differences, if any, because ATX does allow for this. If you click on a line in the balance sheet on pg 4 it takes you to the balance sheet input. On that screen, you will note that the ending retained earnings line is white and doesn't allow for input, but it has an arrow that will "jump" to another worksheet where these timing differences can be entered.

I hope this helps, and I hope you are really in balance at this point, but your statements about the change in shareholder loan and APIC have me wondering.

[joanmcq]

I've taken into account the timing differences on the Lines 3 & 5 M-2 worksheet (startup costs not currently deductible) & on Sch M-1 (depreciation from leasehold improvements not yet deductible since the biz wasn't opened Dec. 31). The leasehold improvements were added to assets. Small amount of penalties on a late tax payment.

I've got the balance sheet open; that's what I'm working with.

[7204 MEM]

The increase in shareholder loan and APIC doesn't affect the AAA at all, they only affect the shareholder's basis.

To be sure that I'm completely in balance, I always opened the "Options" tab in the 1120S form of ATX and checked the box to force completion of the balance sheet and M-1 so that I could view it on the screen, do my final review, sometimes would print pg 4 of the 1120S for my file, and then uncheck the box before filing.

Unless you are keeping the books on the tax basis of accounting and not GAAP, it is entirely possible, and not even unusual, to have a different AAA for tax than AAA per books because of temporary timing differences. Those are the same as for C corps (tax vs book deprec, bad debts, acc'd shareholder distribs, sec 263 inventory adjustments, accr'd shareholder salaries, accr'd vacation pay, cap lease amort and interest, rent adjustment under sec 267, and accumulated timing diffs from prior years that haven't yet reversed. Permanent differences arising from nontaxable income and nondeductible expenses are on Sch K and flow through to M-1 and M-2, and these do not cause differences in the AAA and retained earnings.

Joan, I think you are missing that ATX does have a worksheet to record the timing differences, if any, because ATX does allow for this. If you click on a line in the balance sheet on pg 4 it takes you to the balance sheet input. On that screen, you will note that the ending retained earnings line is white and doesn't allow for input, but it has an arrow that will "jump" to another worksheet where these timing differences can be entered.

I hope this helps, and I hope you are really in balance at this point, but your statements about the change in shareholder loan and APIC have me wondering.

Hi Judy -

In your note above ..."but it has an arrow that will "jump" to another worksheet where these timing differences can be entered"....

Are you still able to "jump" to that worksheet to enter timing differences in ATX 2013 because I can't on Line 24 - keep getting redirected back to Line 8 of AAA. The only place I can make a RE adjustment is Line 25. Help is greatly appreciated!

[7204 MEM]

I found where I think the programmers intended book/tax differences to be input for 1120S Sch L Retained Earnings. It's not exactly a separate schedule. From the BS, jump to the M-2 - Retained Earnings Schedule. It's a table, which is a reproduction of the tax return for AAA with an EXTRA COLUMN titled "Retained Earnings Unappropriated/Timing Differences". It allows you to adjust AAA to book Retained Earnings as well as add an itemized list (which I think will print???). That's were I'll put my current issue which is a Distribution in Excess of AAA. I had the adjustment on BS, Line 25 but don't want to confuse the client (or myself) when this rolls forward to next year.

[joanmcq]

Sweet! That column wasn't in the 2012 program.