When operating below a certain amount of gross sales and net assets, s corporations and partnerships are not required to include a balance sheet with their income tax filings, though it’s a good idea to include one anyway. Here’s why.
Disclaimer: The information presented on this website is only a basic introduction to s corporation and partnership taxes. We strongly recommend that you hire a professional to help you. The information provided here does not replace the IRS instructions for filing taxes. Incorrect filings could lead to large tax bills and penalties. Please hire a CPA or an EA to prepare and file your tax returns.
Requirements for including a balance sheet with a corporate or partnership tax return
As of 2018, for s corporations and partnerships, you are not required to file a balance sheet if your gross sales are less than $250,000 and the assets are below $1,000,000. Note that some states require a balance sheet regardless of gross income or assets.
Also, your bank, lender, investors might demand that you file or at least create one.
There are a few other circumstances in which they may be required so please check the IRS instructions found here (the links open the instructions in a new tab)
It is our recommendation that you always include a balance sheet with your corporation or partnership tax returns.
Tracking the flow of capital and “basis” in s corporations and partnerships
One reason to include a balance sheet with your s corporation or partnership tax return is to track the money as it flows in and out of the business.
Let’s say, for example, two shareholders each contribute cash throughout the year to operate a new business that is not yet turning a profit. The business in it’s first year buys $4,000 in assets and operates at a small net loss of $2,000. There is $4,000 cash left in the bank at the end of the year.
Completing the tax return balance sheet will clearly document and spell all of this out on paper, including how much the assets are now worth after depreciation.
This affects many things such as basis, in case the company is sold or goes out of business, but also the shareholders can see where their finances currently stand.
Please note that, for simplicity, this balance sheet example is incomplete and it does not include other important items such as capital stock – but let’s see how it tracks the cash flow to the s corporation from the shareholders.
Looking at the balance sheet, we can see that there is $4,000 in cash left over, the remaining asset value after depreciation is $3200 and the retained earnings is -$2800 (the net loss and the depreciation).
This means that the shareholders must have provided $10,000 between them which is shown on line 23. They must have – where else would it have come from?
If you had a stake in this business, wouldn’t you want to know the details of these things? Well here they are – all spelled out in one simple report.
Less chance of audit
Historically speaking, those that file a balance sheet with their s corporation or partnership returns are audited less by the IRS. Perhaps this is because the IRS, in some cases, wants to see where and how the money moved around.
If the IRS selected a return for review, had questions about the money and asset flow, but saw that there was no balance sheet, now they will want to talk to you about it.
Please note that I am just speculating here – I don’t REALLY know why he IRS might choose to audit less tax returns because they contain a balance sheet.
Still, audits (I know for a fact) are not pleasant. Even if they only originally had a few questions about your money flow, audits typically include going over every single item to the penny. If this can be avoided by filing a balance sheet, even when not required, we think it is well worth it.
The income tax return balance sheet might not match the books
On a final note, 1120s and 1065 tax filers should realize that the tax return balance sheet might not exactly match a bookkeeper’s balance sheet, like those that are made in Quickbooks, etc.
There are many reasons for this including:
- The bookkeeper is great at bookkeeping but does not fully understand basis, cash flow, and depreciation as it relates to taxes
- There may be business deductions on a tax return that differ form the books, such as miles on a personal vehicle, business meals, and the business use of a personal cell phone
There is actually a schedule on the tax return that reconciles the differences between the taxes and the books – though that doesn’t always work out either for several reasons.
This is another reason why we recommend a CPA or EA for your s corporation and partnership tax preparation.