Small Business Tax Questions – Do You Need A Balance Sheet on Form 1120S?

If you own an S Corporation, you must file Form 1120S every year to report income and expenses to the IRS. Part of Form 1120S is a balance sheet. Read on to find out whether you have to complete this balance sheet in order for the tax return to be complete.

First, let’s review the purpose of a balance sheet – it is a financial report that lists the asset, liability and shareholder’s equity accounts. It is found on page 4 of Form 1120S and is known as Schedule L.

Now note this – as part of Schedule B, Item 8, there’s an interesting question – “Are the corporation’s total receipts for the tax year and its total assets at the end of the tax year less than $250,000? If ‘Yes,’ the corporation is not required to complete Schedules L and M-1.”

This is good news for those who prefer not to include a balance sheet. This reporting rule is quite simple: if sales and assets are less than $250,000, you do not have to complete Schedule L, which is the balance sheet portion of corporate income tax return.

For small business owners who prefer to report as little information as possible on their income tax returns, this is good news. You just don’t have to deal with a balance sheet and the IRS will still accept your tax return. As long as your business remains relatively small, then you’ll never have to do this.

But keep this in mind – there may come a day when you need a balance sheet. For example, if your business applies for a loan, any good lending institution will want to see a full set of financial statements, including a balance sheet, in order to process your loan application. There may come a day when you need a loan, so why not get into the habit of preparing a balance sheet now?

Here’s another compelling reason to do a balance sheet even if it’s not required on the income tax return: it’s a great way to get a snapshot of your business’ financial condition as of a particular date. Savvy business owners want to know how their business is doing. Financial statements provide the information you need to make informed decisions about managing your business. An income statement tells you whether your business is profitable and if not, why not. The balance sheet shows you what the business owns and owes – this, too, is critical information about the financial health of your company.

So even though you may meet the criteria for not including a balance sheet on your corporate income tax return, it makes sense to do one any way.

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