What Is Schedule L on a Tax Return?

Schedule L is a balance sheet that provides the IRS with a financial overview of a business. It is a component of several tax returns, including Form 1065 for partnerships, Form 1120 for C corporations, and Form 1120-S for S corporations. The schedule presents a snapshot of a company’s financial health at the beginning and end of the tax year by listing its assets, liabilities, and equity.

Filing Requirements for Schedule L

A business must file Schedule L if it meets certain financial thresholds that vary by entity type. For S corporations and C corporations, the requirement is triggered if total receipts for the tax year were $250,000 or more, or if total assets at the end of the tax year were $250,000 or more. Partnerships must file if their total receipts are $250,000 or more, or if their total assets at the end of the tax year are $1 million or more.

Certain conditions may necessitate filing Schedule L regardless of the receipt and asset thresholds. If a business is required to file Schedule M-3, a more detailed reconciliation of book income to taxable income, it must also complete Schedule L. For corporations, this applies to businesses with total assets of $10 million or more. Partnerships are also subject to this asset test but must additionally file Schedule M-3 if their total receipts are $35 million or more, or if a single partner owns an interest of 50% or more in the partnership.

Information Needed for the Balance Sheet

Preparing to complete Schedule L involves gathering specific financial data from the company’s records. This information is organized into assets, liabilities, and equity, with figures reflecting balances at both the start and end of the tax year.

Assets

Assets are economic resources owned by the company. For Schedule L, you will need to compile a list of all business assets and their values, which include:

• Cash on hand and in bank accounts
• Trade notes and accounts receivable
• Inventories
• U.S. government obligations
• Tax-exempt securities
• Other investment assets
• Buildings and other depreciable assets
• Land

Liabilities

Liabilities are the financial obligations or debts owed by the business. You will need to list all outstanding liabilities, which include:

• Accounts payable
• Mortgages, notes, and bonds payable in less than one year
• Mortgages, notes, and bonds payable with a maturity of one year or more
• Other current and noncurrent liabilities

Equity

Equity represents the net worth of the company, which is the value of the assets remaining after deducting liabilities. For corporations, this section includes figures for capital stock (preferred or common), additional paid-in capital, and retained earnings. Retained earnings are the cumulative profits of the company that have not been distributed to shareholders.

A Guide to Completing Schedule L

Once all financial data is gathered, you can begin filling out the form. Schedule L is structured with columns for beginning-of-year and end-of-year balances, and the process involves transferring your compiled figures onto the corresponding lines.

The top half of Schedule L is dedicated to assets. You will enter figures for accounts receivable, inventories, government obligations, and other investments. For depreciable assets like buildings and equipment, you will report the original cost and then subtract accumulated depreciation to arrive at a net figure. The form requires you to total all these assets at the bottom of the section.

The bottom half of the form addresses liabilities and stockholders’ equity. You will enter accounts payable, followed by mortgages, notes, and bonds payable, separated by whether they are due within one year or longer. After listing all liabilities, you will move to the equity section to input values for capital stock, paid-in capital, and retained earnings. The total of liabilities and equity must equal the total assets reported in the top section.

Connecting Schedule L to Schedules M-1 and M-2

Schedule L is interconnected with other parts of the tax return, primarily Schedule M-1 and Schedule M-2. It is prepared using the company’s book figures, which are based on financial accounting principles. These figures may differ from the amounts reported for tax purposes due to different rules for book versus tax accounting.

Schedule M-1, the Reconciliation of Income (Loss) per Books With Income per Return, bridges the company’s book income and its taxable income. It starts with the net income from the company’s books and then lists adjustments for items treated differently for financial reporting than for tax, such as depreciation or non-deductible expenses. The result is the taxable income reported on the main tax form.

The connection to Schedule L is most direct through Schedule M-2, the Analysis of Unappropriated Retained Earnings per Books. This schedule details the changes in a corporation’s retained earnings account during the year. It begins with the retained earnings balance at the start of the year, adds net income, and subtracts distributions like dividends. The ending balance on Schedule M-2 must match the end-of-year retained earnings figure reported on Schedule L.