Common questions about the balance sheet for an S-Corporation in Lacerte

This article answers frequently asked questions about balancing Schedule L and calculating ending retained earnings for an S-Corporation (Form 1120S) in Lacerte.

Balance sheet issues and retained earnings calculations are closely related. An out-of-balance condition is often caused by incorrect retained earnings, Schedule M-2 entries, distributions, or book-to-tax differences.

Table of contents:

Why is my Schedule L balance sheet out of balance?

The following diagnostic may generate:

Federal ending balance sheet out of balance by $#. Total ending assets = $#. Total ending liabilities and equity = $# (Ref. #25266)

This occurs when total assets do not equal total liabilities plus equity.

Common causes in the S-Corporation module include:

• Beginning balances entered incorrectly.
• Retained earnings not updated for current year book income.
• Distributions entered on Schedule K but not reflected in equity.
• Book depreciation or amortization not entered on the balance sheet.
• Schedule M-2 not reconciling to Schedule L.
• Accumulated earnings and profits (E&P) entered without adjusting equity.

Most balance sheet issues are equity-related rather than asset-related.

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How do I turn off the out-of-balance diagnostic?

If the balance sheet is not required and you don’t want Lacerte to generate the warning:

To turn off globally (all S-Corporation clients):

1. Go to Settings.
2. Select Options.
3. Select the Tax Return tab.
4. Scroll to Federal Tax Options.
5. Locate When Balance Sheet not Required, Alert if Out of Balance.
6. Select No.

To turn off for a single S-Corporation client:

1. Go to Screen 30, Balance Sheet Miscellaneous.
2. Scroll to the Other subsection.
3. Enter 1 in: When balance sheet not required, produce diagnostic if out-of-balance (1 = no, 2 = yes) [O]

Suppressing the diagnostic doesn't correct the imbalance, it only prevents the warning from generating.

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How is ending retained earnings calculated?

Ending retained earnings generally equal:

Beginning retained earnings

• Current year book income
  – Distributions
  ± Other book adjustments

In Lacerte, retained earnings are primarily affected by:

• Screen 32 – Federal Schedule M-2
• Current year book income
• Shareholder distributions
• Book/tax differences (Schedule M-1)
• Accumulated earnings & profits entries

If retained earnings do not reconcile, review Schedule M-2 first, then confirm distributions and M-1 adjustments.

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Where do I enter accumulated earnings and profits (E&P)?

Accumulated E&P can trigger additional calculations, including Excess Net Passive Income (ENPI) tax.

You can indicate accumulated E&P in either of the following locations:

1. Screen 3 – Miscellaneous Info/Other Info
   • Check the box: Accumulated earnings and profits at year end
2. Screen 32 – Federal Schedule M-2
   • Enter amounts in: Additions to other retained earnings [A]

Entering E&P may impact Schedule L equity, Schedule M-2, and ENPI tax calculations.

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How does Excess Net Passive Income (ENPI) tax affect the balance sheet?

An S-Corporation must pay ENPI tax if:

• It has accumulated E&P at year end, and
• Passive investment income exceeds 25% of gross receipts, and
• It has taxable income (calculated using C-Corporation rules).

Lacerte generates:

• An ENPI Worksheet
• A Corp Tax Inc Worksheet

Overrides are available in:

• Screen 37 – Federal Taxes, under the Excess Net Passive Income Tax section.

Because ENPI tax reduces income, it affects Schedule K, Schedule M-2, and retained earnings.

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Best practices for balancing Schedule L

When troubleshooting an imbalance:

1. Verify beginning balances.
2. Confirm distributions match shareholder entries.
3. Review Schedule M-1 for book/tax differences.
4. Confirm Schedule M-2 rollforward of retained earnings.
5. Check for E&P entries triggering ENPI calculations.
6. Review book depreciation entries on Screen 30.

Schedule L should reconcile to Schedule M-2 and current year book income.

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Related articles

• Balancing an Out of Balance Sheet on Form 1120S
• Calculating Ending Retained Earnings for an S-Corporation Return