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Shane-CPA
Shane-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 265
Experience:  Shane Northrop is a Certified Public Accountant, Personal Financial Specialist and a Chartered Global Management Accountant
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My balance sheet generated in Quickbooks, in addition to listing

Customer Question

My balance sheet generated in Quickbooks, in addition to listing my Capital Stock, and my retained earnings, lists a negative equity amount as part of satisfying the Assets = Liabilities + Equity. I would note that I also have negative retained earnings. There appears to be nowhere on Form 1120s, Schedule L to list negative equity and thus the Balance Sheet is out of balance on that form. Where/how do I rectify this?
Submitted: 11 months ago.
Category: Tax
Expert:  Shane-CPA replied 11 months ago.

Shane-CPA :

Hello...my name is XXXXX XXXXX X am a Certified Public Accountant. I look forward to assisting you with your tax question.

Shane-CPA :

A company cannot technically have negative equity which is why the tax return forms don't allow for you to enter a negative amount. Instead, the S-Corporation members are generally required to make a contribution to the Corporation to bring the equity balance to a zero or positive amount.

Shane-CPA :

Depending on the amount of earnings you are reporting, you may be able to elect out of having to prepare the balance sheet (Schedule L) and Schedule M-1.

Shane-CPA :

I hope this helps to answer your question and provide you with clarity on preparing the tax return. If you would like further assistance, simply respond in this chat and I will be happy to assist you further.

Shane-CPA :

If this answers your question to your complete satisfaction, then I thank you for allowing me to assist you and I look forward to assisting you again in the near future. Please provide me with positive feedback so I may receive credit for my response. Thank you for using Just Answer and I hope you have a great evening!

Customer:

It is after the end of the tax year, so "making a contribution" doesn't seem like an option -- I have a situation where the total of outstanding liabilities plus capital stock plus retained earnings does not equal total assets on the 1120S schedule L. FYI, retained earnings are negative, reflecting intermittent years of losses.

A substantial portion (but not all) of the difference between assets and (liabilities + equity) is the amount of the "due to shareholder" account. If it is a permissible thing to do, I could forgive this.

The thing I don't understand (not having enough understanding/intuition about accounting) is whether this 1120S view of my balance sheet should always balance if the all figures from my quickbooks are accurately reflected in it. My Quickbooks balance sheet of course doesn't observe the constraint on S Corps that negative equity is not allowed. I have reviewed Quickbooks to ensure that there are no unbalanced postings (ie a posting not done double-entry). I think it is all correct but maybe that is the source of the imbalance in the 1120s that is displayed in Quickbooks as negative equity. The thing is, my common-sensical understanding is that the business currently has a negative net worth for the tax year in question (2011). If I make AJEs to reverse all of the postings for expenses incurred by shareholder on behalf of the business, that would eliminate the liability to Shareholder (me), but it would also reduce the company's expenses, thereby increasing its profit and reducing the current negative retained earnings by an equal amount, which still leaves the 2011S balance sheet imbalanced.


Customer:

if you can to comment on my last question, that's appreciated, but if it's beyond the scope of what you'll do, that's understood. Your first answer WAS responsive to my question, so I will indicate satisfaction so you can make the small fee associated with this service. Thanks.

Shane-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 265
Experience: Shane Northrop is a Certified Public Accountant, Personal Financial Specialist and a Chartered Global Management Accountant
Shane-CPA and 8 other Tax Specialists are ready to help you
Expert:  Shane-CPA replied 11 months ago.
Hello...Thank you for the positive feedback and response. If the "Due to Shareholder" account is a liability on the balance sheet, which it sounds like it is, you can reclassify this as a distribution to the shareholders which will reduce the liability and help to lessen the negative equity in the S-Corporation. Depending on what other liabilities exist on the balance sheet, you may be able to make an adjusting entry to close the account(s) out to retained earnings. I hope this helps to clean up the financial statements for you. If you have any additional questions on this, please let me know.

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