2014 S Corp Tax Return Balance Sheet Doesn't Tie to Books

[David]

New S Corp client has been in business since 2008 and uses accrual basis. The 2014 balance sheet in the tax return doesn't equal the balance sheet per the books. The main difference is the book income and accumulated depreciation reflect sec 179 deductions. For example, the balance sheet on the tax return shows fully depreciated fixed assets and doesn't reflect book accumulated depreciation.

Do any of you report the balance sheet this way? I am used to reporting the balance sheet per the books and reconciling the book vs. tax income by reporting book depreciation.

I am thinking of changing the beginning balance sheet numbers to correctly report the 2014 balance sheet per the client's books. I guess I will need a statement explaining this, however I don't want this to backfire.

The difference between the total assets is the difference between sec 179 vs. book depreciation. So no problem explaining this in a statement.

However, the accounts payable per the tax return is $3K greater than the book amount and the equity per the books are $103K greater than the tax return after adjusting for the book vs. tax depreciation amount.

I don't have time to find out what these differences are and the client doesn't know.

I wouldn't think my explanation would be sufficient to simply state that I am changing the beginning balance sheet amounts to reflect the balance sheet per the books, would it? I can explain that the major reason is the book vs. tax depreciation. However, there is the AP and equity differences.

How have those of you who have had this situation handled it?

It would be easier to continue reporting as in the past and be consistent. But shouldn't the balance sheet in the tax return match the balance sheet per the books, or is this not important?

Thanks for your help.  

 

[jklcpa]

Does the company have financial reporting needs with outsiders?  If not, it might be easier to convert the book accounting to tax basis reporting than the other way around.

[Lee B]

I do a number of business tax returns, almost all of which have book / tax differences.

I have always reported the balance sheet per the books.

Then you reconcile the difference between book income and tax income on the  M -1. 

I've been it this way for 24 years and it always seems to work.

[David]

Does the company have financial reporting needs with outsiders?  If not, it might be easier to convert the book accounting to tax basis reporting than the other way around.

 

Currently they have no outside reporting needs. However, they are a manufacturing company and there may be requirements down the road for a financial review due to LOCs or other loans. They have loans now but aren't required to have a financial review. I will have to check with them to see if they are required to submit their financial statements. 

When you say convert the book accounting, do you mean that instead of recording book depreciation they will record tax depreciation? This is what a lot of smaller companies do but this is a larger company and they actually calculate book depreciation and prefer to record that instead of what the CPA reports on the tax return.

Yes, I agree that would be a lot easier. But it probably wouldn't work to change what they are doing just to match how the prior tax returns were prepared.

[David]

13 minutes ago, cbslee said:

I do a number of business tax returns, almost all of which have book / tax differences.

I have always reported the balance sheet per the books.

Then you reconcile the difference between book income and tax income on the  M -!. 

I've been it this way for 24 years and it always seems to work.

Yes, I prefer to report this way. However, in this case, since the previous tax preparer didn't report this way, how have you handled changing the beginning balance sheet amounts? And would you address the difference between AP and equity or would you simply report the client's beginning balance sheet amounts?

Thanks.

[David]

I meant to also add to my last comment....

and explain in my statement that the previous balance sheets reported tax basis balances instead of book balances? And just leave it at that?

Thanks.

[jklcpa]

To answer your questions, the tax return balance sheet should reflect the "book" method balances with the timing differences on M-1 as cbslee described above.

I converted my last company over to tax method when the banker requested it because she couldn't understand the the various differences creating the deferred income tax assets. 

Years ago I had a company that had a small error in the beginning balances that I corrected by changing to correct amounts on the return and attaching a statement explaining it and that the correction had no effect on any year's taxable income or income tax liability.  A difference of $100K is no small potatoes. I'm not sure if that would get someone's attention or not. It is possible that this was sloppy input by the previous preparer where the tax software balanced the return by changing the retained earnings. Mine will try to do that and is the reason I always turn the auto-balancing feature off.  I know what the #s should be and will input each one, look to the error report for differences, and then I go back to the input to fix the dollar or two of rounding as needed.

[Abby Normal]

18 minutes ago, jklcpa said:

I converted my last company over to tax method when the banker requested it because she couldn't understand the the various differences creating the deferred income tax assets. 

 

Many years ago, I started out with book depreciation, then realized it was way too much work, and no one but me understood it! Been doing tax basis books ever since. It's way easier for the IRS, too!

[David]

So even though Schedule L is titled Balance Sheet Per Books, the IRS doesn't have a problem with reporting the tax basis?

[jklcpa]

15 minutes ago, David said:

So even though Schedule L is titled Balance Sheet Per Books, the IRS doesn't have a problem with reporting the tax basis?

 

The balance sheet on the tax return should be completed using the method of accounting used for book purposes. If that method happens to be accrual on the income tax basis of accounting, then the balance sheet on the return would be tax basis.

[David]

33 minutes ago, jklcpa said:

To answer your questions, the tax return balance sheet should reflect the "book" method balances with the timing differences on M-1 as cbslee described above.

I converted my last company over to tax method when the banker requested it because she couldn't understand the the various differences creating the deferred income tax assets. 

Years ago I had a company that had a small error in the beginning balances that I corrected by changing to correct amounts on the return and attaching a statement explaining it and that the correction had no effect on any year's taxable income or income tax liability.  A difference of $100K is no small potatoes. I'm not sure if that would get someone's attention or not. It is possible that this was sloppy input by the previous preparer where the tax software balanced the return by changing the retained earnings. Mine will try to do that and is the reason I always turn the auto-balancing feature off.  I know what the #s should be and will input each one, look to the error report for differences, and then I go back to the input to fix the dollar or two of rounding as needed.

Thanks for helping with this. I just recalculated the equity and it isn't off by $103K. It is off by $3K. My apologies.

The $3K difference is the difference between the 2014 AP book balance vs. tax balance. The tax balance is higher. I looked in the company's QB file and didn't see anything in 2014 that would account for this difference. The client won't know why the tax preparer has a different amount.

So most of the difference is due to the tax vs. book depreciation. If I include a statement that says the balance sheet has been converted from tax basis to book basis and the differences are due to the sec 179 vs. book depreciation, do you think that will fly?

Or is the $3K a big deal? The book equity is $1.1 million and the tax equity is $500K. The equity difference is $623K with $620 being book vs. tax depreciation differences and $3K being the AP balance. 

Thanks.

[David]

55 minutes ago, jklcpa said:

 

The balance sheet on the tax return should be completed using the method of accounting used for book purposes. If that method happens to be accrual on the income tax basis of accounting, then the balance sheet on the return would be tax basis.

Thanks. I agree. The client's method of accounting is accrual basis on the book basis of accounting. They are savvy enough to realize that there is a difference between book and tax depreciation.

[Terry D EA]

Judy and CBSLee have given the best advice here. As you also pointed out, the statement explaining your changes would be a good way to handle this. Like others, I use the tax depreciation as well. I am working on an S-Corp right now that the owner should fire the bookkeeper. Several discrepancies in the expenses, owner compensation; etc. I pulled reports from paychex to validate the payroll expenses. The rest of it I'll never see. They have signed an engagement with the language that I am not conducting an independent review or audit of their information and that by signing the agreement, they state that all expenses can be substantiated and the tax return will be prepared from the information they have provided. Anything I find that is contrary to law I question and draft a statement as to the changes and reasons for them. CYA at all times!