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The Importance of Balance Sheets

Many Tax Preparers and Advisors, and Tax Return Reviewers at do not prepare a Balance Sheet as part of Schedule L on a partnership, regular C corporation or a subchapter S corporation return because it is not required with certain thresholds promulgated by the Internal Revenue Service. This is the case even when there is a Balance Sheet available to input into the income tax return.


The States of New Jersey and California, and possibly other states, require a Balance Sheet without any regard for the threshold limitations the Internal Revenue Service has.


The Balance Sheet is good to have on every tax return, even if not required, because it offers a trail of information of the client from one tax return to the next and a good way to compare the same with the financial statements for such partnership, regular C corporation or subchapter S corporation.


Basis in a partnership interest determines if any losses allocated to each partner of a partnership are deductible against other income on the individual income tax return of the partner. The higher the basis, the higher the amount of losses deductible both currently and in the future.


A share of any increase in liabilities during the year increases such a basis in a partnership interest for each partner. Both the beginning of the year and end of the year amounts are considered for this purpose. These amounts are on a Balance Sheet.


For a subchapter S corporation, the Balance Sheet on the return shows loans made from the shareholder to the subchapter S corporation. Such information increases basis for a shareholder interest in a subchapter S corporation. More basis, more loss deductions against other income on the individual shareholder income tax return.


A lack of any such Balance Sheet on the tax return can cost eligibility of the individual partner for deducting these losses on the partner’s individual income tax return.


It should also be communicated to a client that does its own booking, or does not have any bookkeeping at all, of the importance of having an accurate and complete Balance Sheet.


A balance on the business tax return for every single year allows the reconstruction of any stock basis and/or debt basis for a partnership, or a subchapter S corporation, respectively.


By: Angelo Liberati for Accountants on Air

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A. Liberati