How does ProConnect calculate retained earnings for Form 1120S?

 ProConnect calculates the ending balance of retained earnings for the s-corporate balance sheet Schedule L, Line 24, using your entries throughout the tax return. This article will help you understand the program's calculation and identify which entries affect the retained earnings.

How retained earnings are calculated

You can view the detailed calculation on the worksheet titled Reconciliation of Retained Earnings. ProConnect calculates ending retained earnings as follows:

Beginning retained earnings

• Plus net income per books (from Schedule M-1, Line 1)
• Plus Additions to other retained earnings
• Plus Accumulated Adjustment Account (AAA): Other Additions to carry to Schedule L
• Less distributions from AAA (Schedule M-2, line 7, column a)
• Less distributions from Other Adjustments Account (Schedule M-2, line 7, column d)
• Less distributions from previously taxed income (Schedule M-2, line 7, column b)
• Less dividend distributions from accumulated earnings & profits (Schedule K, line 17c)
• Less distributions in excess of Schedule M-2/earnings & profit accounts
• Less Reductions to other retained earnings
• Less AAA: Other Reductions to carry to Schedule L

= your ending retained earnings, Schedule L, Line 24, column (d).

Where do I enter beginning retained earnings?

Your beginning retained earnings will typically roll over from last year's return, or be calculated based on your "Beginning balance" entries on the Schedule M-2 screen. If the beginning balance is blank or incorrect, follow these steps to enter the right amount:

1. Go to the Input Return tab.
2. On the left-side menu, select Balance Sheet, M-1, M-2, M-3.
3. Click on Schedule M-2.
4. Enter the Beginning balance for each section on this screen:
   • Accumulated Adjustments Account
   • Shareholder Undistributed Taxable Income
   • Accumulated Earnings and Profits
   • Other Adjustments Account
   • Other Retained Earnings (Schedule L)

The sum of these beginning balances will flow to Schedule L, line 24, column b.

What if net income (loss) per books is wrong?

This amount is calculated on the Schedule M-1, which starts with the s-corporation's income for tax purposes and works backwards through book-to-tax adjustments to arrive at book income. See Entering and calculating the Schedule M-1 in ProConnect Tax for help adjusting these amounts.

Where do I enter adjustments to retained earnings?

To enter any additions or reductions to retained earnings:

1. Go to Screen 32, Schedule M-2.
2. Go to the Input Return tab.
3. On the left-side menu, select Balance Sheet, M-1, M-2, M-3.
4. Click on Schedule M-2.
5. Enter the adjustment in the appropriate section:
   • Accumulated Adjustments Account (Schedule M-2),
   • Other Adjustments Account (Schedule M-2), or
   • Other Retained Earnings (Schedule L).

Note that entries made in other additions or reductions to the Accumulated Adjustment Account don't automatically carry to ending retained earnings, unless entered in "Amount of Other Additions/Reductions to carry to Schedule L." The AAA isn't a reconciliation of beginning to ending retained earnings. If the total ending balance of Schedule M-2 doesn't equal the ending balance of retained earnings on Schedule L, the program will generate a worksheet reconciling the difference.

Where do I enter distributions?

To enter dividend distributions paid from accumulated earnings & profits:

1. Go to the Input Return tab.
2. On the left-side menu, select Schedule K.
3. Click on Other Schedule K Items.
4. Scroll down to the Other Information section.
5. Enter the amount in Dividend distributions paid from accumulated E & P.

To enter nondividend distributions (including cash and loan repayments):

You can either enter each shareholder's nondividend distributions, or enter the total for all shareholders and have the program allocate the amounts by ownership percentage.

To enter a set dollar amount per shareholder:

1. On the left-side menu, select Shareholder Information.
2. Click on Distributions, Loan Repayments.
3. Enter the appropriate amount for each shareholder.

Or, to allocate distributions based on stock ownership:

1. On the left-side menu, select Schedule K.
2. Click on Other Schedule K Items.
3. Scroll down to the Items Affecting Shareholder Basis section.
4. Enter the total Distributions (cash and property) for all shareholders.