Some S corporation and partnership tax returns require balance-sheet reporting on Schedule L. Even when Schedule L may be omitted under applicable filing rules, reliable accounting records remain important for preparing an accurate business return.
What Is Schedule L?
Schedule L reports the entity’s balance sheet at the beginning and end of the tax year. Typical accounts include cash, receivables, fixed assets, accumulated depreciation, liabilities, capital accounts and retained earnings or accumulated adjustments.
Why Does Schedule L Increase Return Preparation Work?
A balance sheet cannot simply be added at the end of the tax preparation process. Beginning balances must generally reconcile to the prior-year return, ending balances must agree to the current accounting records, and changes during the year must be consistent with income, distributions, contributions, loans and other activity.
Book-to-Tax Reconciliation
Business returns requiring balance-sheet reporting often also involve Schedule M-1, Schedule M-2 or related reconciliation workpapers. These reconcile differences between financial accounting records and tax reporting.
S Corporation Returns
For S corporations, balance-sheet issues commonly involve shareholder distributions, loans to or from shareholders, retained earnings, accumulated adjustments and fixed assets.
See S corporation tax return preparation and S corporation return preparation with balance sheet.
Partnership Returns
For partnerships, the accounting records may also need to reconcile partner contributions, distributions, liabilities and capital accounts.
See partnership tax return preparation and partnership return preparation with balance sheet.
Complete Books Matter Even When Schedule L Is Not Required
The ability to omit Schedule L does not mean accounting records are unnecessary. Reliable books remain necessary to determine income, deductions, asset balances, liabilities and owner activity reported elsewhere on the return.