For an s-corp, when the employee retention credit is entered on screen 15, Lacerte automatically reduces the wages reported on Line 8 on Page 1 of the return. However, it is also making an M-1 adjustment for the wage expenses recorded on the books but not on the tax return. This is causing my balance sheet to be out of balance by the credit amount. Would the appropriate fix be to record an additional M-1 adjustment for income recorded on books, but not on the tax return, for the employee retention credit amount? Alternatively, overriding the automatic M-1 adjustment that Lacerte is creating to 0 would work. I'm just hesitant to do either of these options, because you would think Lacerte would do this automatically. Any thoughts?
I called Lacerte, and the person I spoke with agreed that an M-1 shouldn't be created. He recommended entering a negative amount for the M-1 adjustment that is showing up in screen 31.1 under Expenses Recorded on Books Not Included on Schedule K (+) > Other > Other. This made me in balance and my Schedule M-1 is correct. However, my Schedule M-2 still isn't correct, and is off by the credit.
I guess if I put the negative amount in 2 places it does make the Sch K, Balance Sheet, M-1 and M-2 come out right:
Screen 31.1/Schedule M-1/Non-deductible Expense Other
Screen 27/Other Sch K Items / Non-deductible expense line 16c(A)
There has to be a lot of people running into this and Lacerte saying to put a negative amount in to fix this is pretty disappointing. Just seems like this is a pretty common credit this year and it should be fixed by now. Thank you for your reply - I really appreciate it!!
I commented on another string about this very issue a couple days ago. Seems like a lot of us are having this problem. I just reduce wages by my ERTC directly in the salaries and wages box and ignored the ERTC box altogether. That way my Balance Sheet, M-1, and M-2 all tie out.
I called Lacerte yesterday. After talking to support (who wanted me to check my Schedule C input on the 1120s return...WOW)...finally, finally after 3 hours and waiting for an agent to review the file they said "This is a program error - that will have to be fixed and come in a program update". I just decided if I didn't stay on the line this will never get fixed. The support person said "yeah...most people just give up and try to find a work around".
3 weeks till the 1120s are due with a very common new tax credit. Pretty disappointing.
I called Lacerte this morning and was so disappointed with the person who helped me. He yelled at me and said that the reason it is not working is because my return was out of balance to begin with (it was not). I proved him wrong by showing him I could enter it as a direct reduction to wages instead of the line below it, but he never admitted the input is broken. When I argued that there doesn't need to be an M-1 adjustment, because there is no book tax difference (I put it on my books as a direct reduction to wages, thus no M-1), he said that didn't matter, this was informational for the IRS so it needed to be on the Schedule M-1??? He had no idea what he was talking about. Extremely disappointed with Lacerte software and support help.
I believe I may have found the solution to the M-1 issue because of the employee retention credits (from another online message board).
On the books, I show the employee retention credit in other income. On the tax return, I don't show it as other income but rather as a reduction of wages (in the 'less retention credit box' in lacerte). Naturally, the other income is not being reported in lacerte because it is already showing as a reduction of wages and with a corresponding m-1 adjustment in lacerte and on the tax return.
Since the other income is not reported in Lacerte, an M-1 adjustment is needed for 'income recorded on books and not on schedule K,' using an appropriate explanation.
In any case, this will balance the balance sheet.
That was the first solution I thought of, I just thought it might look funny to have the same M-1 adjustment on both sides that wash it out.. You would think Lacerte would automatically create the other M-1 adjustment to keep the return in balance.
Yes, you would have thought Lacerte would have made this easier and I sure would have thought they would be able to explain the solution when calling them. I was on an hour and a half with Lacerte with no results.
In any case, if you take this solution then you will want to make the 'other income' m-1 adjustment is made to 'tax exempt income on the books not on schedule k'. You have to use 'tax exempt' in order to keep the basis schedule correct.
Im still confused at this late date;
Does the retention credit suppose to reduce basis (line 13 of 7203) ?
Is the Employee retention credit tax exempt income ?
Is the Employee Retention credit a contribution to capital to make the balance sheet balace ?
Sorry I am late, was doing some research on this topic and found this thread. We do offer an informational diagnostic in both the Partnership and Scorproation tax types that advise we are making this M-1 adjustment. This diagnostic will jump back to the balance sheet miscellaneous screen. We added an override labeled Schedule M-1 adjustments for refundable employment tax return credits: 1=yes, 2=no [O]. As this is an override we can also change the default. In options on the Tax Return tab under Federal Tax Options there is a similar heading. If we change the option to no it will default all returns to not include the adjustment and no override would be needed.
Thank you for pointing out the inconsistencies with CA. This option affects CA in the corporation tax type but not S corporations. Partnerships as well we do not make an adjustment at all regardless of the option used. The information about these inconsistencies has been forwarded to our development teams for review.