Fixing balance sheet on 1065

[Kea]

Tax Matters partner has been preparing 1065 manually for approx 40 years. I'm taking it over this year.

The balance sheet includes 2 assets that were written off previously. A total of $615 was included on line 13 ( d ). But it seems to me (and I am new to this) that lines 9a ( c ) and 9b ( c ) should each be increased by $615.

How can I "fix" this? I don't think I can change the beginning 2010 balance sheet -- it should match the ending 2009 balance sheet, right? I can show it in the right place on the 2010 ending balance, but then how do I reconcile it? I considered showing it on line 7 of the M-1, but it isn't a K-1 item (and it shouldn't be).

I apologize if this is too basic a question. I did take an accounting class in high school and remember a few basics. But I just don't know how to "fix" a previous problem. I don't really want to amend because I don't want to open a can of worms and tax implications are de minimis.

Thanks

Edit -- Or, do I just ignore it until if / when the assets are sold? Then try to figure an adjustment at that time.

[OldJack]

The prior year should have the amounts on line 9. Just go ahead and add them now. Nothing wrong about correcting when it does not change the bottom line.

[Kea]

Thanks OldJack.

Just to make sure I understand -- you are saying I should change lines 9 and 13 on the beginning balance portion? Even if that would be different from the ending balance on the 2009 Form 1065? It would change the beginning balance of each partner's capital account.

But the K-1s would not be affected and that's what's most important.

I have her asset list with original basis & everything fully depreciated. These 2 items were not previously in the line 9 totals. The net of 9a and 9b would still be $0.

(hummm, I wonder what depreciation method was used back in the 1970s for the farm buildings and equipment? -- Doesn't matter, basis is all $0 now.)

[mcb39]

I sometimes wonder if anyone ever looks at these anyway. I know I messed up some in the early days. I agree with Old Jack. Fix it and move on. The bottom line is what matters.

When you mention depreciation in the 70's it reminded me that I have a new client coming in who bought a property in 1974 and proceeded to rent it out. They sold it this year at a profit (huge). I am curious to see how she did the depreciation by hand for all of these years. I know the depreciation addback is ordinary income. Should be fun.

[Kea]

I just want to make sure it's OK to change the 2010 beginning balance even if that means it won't match the previous year's ending balance.

I realize I'm sounding a bit paranoid, but I just don't want to mess it up. I haven't done a 1065 before, so I don't have a feel yet for priorities. (Also, I think my client will probably be concerned about the mismatch. I just want to make sure I will correct when I reassure her that it's OK.)

[samingeorgia]

Marilyn, we are talking about real property here, aren't we?

Even if they used a thirty year depreciation schedule for an asset placed in service in 1974, the building is fully depreciated, whether they used SL or an accelerated method. Wouldn't the ordinary income recapture be the excess of depreciation above the straight line amount? If so, it seems to me that there is no ordinary income recapture, since the accumulated depreciation would be the same regardless of method.

Maybe I'm wrong; these seven day work weeks are getting to me....

[Kea]

I was re-reading the posts here I realized I may not be explaining correctly or possibly reading correctly.

The 2 assets are still showing as "other assets" on line 13. Even though the cost had been written off, there is no depreciation shown on the balance sheet. It still shows the $615. It should have the asset listed on 9a and depreciation on 9b. This would decrease the Total Asset line by $615. It will also reduce the total of the partnerers' capital accounts by $615.

When I first read OldJack's and Marilyn's answers I thought by "bottom line" they were referring to the K-1. Now, I'm thinking they mean the Total Assets (and Total Liabilities &.Capital) That figure does change. That's why I'm trying to figure out how to reconcile without impacting the K-1s.

So I know I should correct the balance sheet; I'm just not sure how (or if) to justify changing the prior year ending balance to the current year prior balance. Or if there is a way to reconcile it without impacting the K-1s.

Thanks

[mcb39]

Marilyn, we are talking about real property here, aren't we?

Even if they used a thirty year depreciation schedule for an asset placed in service in 1974, the building is fully depreciated, whether they used SL or an accelerated method. Wouldn't the ordinary income recapture be the excess of depreciation above the straight line amount? If so, it seems to me that there is no ordinary income recapture, since the accumulated depreciation would be the same regardless of method.

Maybe I'm wrong; these seven day work weeks are getting to me....

Are the work weeks really only seven days? Back to the books for me. I thought I understood that the recaptured depreciation was treated as ordinary income and the rest of the profit was treated as CG. I realize that it might be totally depreciated, however, I have not met with this lady yet and she told me on the phone that they had done extensive improvements to the house. I don't know if that was right away or several years down the road when they turned it into a rental. Hey, I love a challenge and they made a substantial profit so I know there is something in this for me. I was recommended to them by two people when she didn't have a clue where to go and it sounds as though she kept meticulous records, whether correct or not. Since they are retired, the gain may not even be such a terrible issue for them unless it kicks SS into being taxable.

[OldJack]

Well, I misunderstood. You can NOT change the amount of the total assets. How can you say it is fully depreciated if it still has a positive value? Maybe you ment it should have zero book value?

[Kea]

Of the $615 shown on line 13, $600 was for a bull purchased in 2008. The 2008 Schedule F has $700 as "other expense" labeled "New bull." It wasn't taken as depreciation (even Section 179), but was just expensed. [she likes to keep things simple.] She told me she doesn't do depreciation because she likes to keep things simple. But expensing it would have the same effect. So, it shouldn't be included on line 13. But I'm not sure how to correct it after the fact. I think book value should be $0, not $600. (And, no, I don't know why there is a $100 difference, but I'm guessing it was some sort of adjustment to make something balance. The 2009 return is a bit stranger. Not worth amending because tax consequences are de minimis.)

I hope I'm explaining better now.

[OldJack]

I would leave prior year as shown and adjust current income/expense to make current year balance sheet correct. If the prior year preparer was a paid preparer they should be reported to any organization they are a licensed member.

[Kea]

The tax matters partner is the one who has been preparing it the whole time. It really is an innocent error. (I've known her ar long time -- she's family.) I may not know much about a 1065, but I do have more general tax knowledge than she does. So, I figured it was about time I learned how to help with this return.

But if I adjust the current year expense to make the balance sheet correct, that gives an extra deduction on the K-1 that was previously taken. Is there a way to reconcile without affecting the K-1s? Is there a way to allocate it to some kind of misc non-deductible expense?

Thanks. I'm trying to learn as I go.

I apologize if my question remains too basic. But I gotta learn sometime. I really appreciate all the help on this board.

[Gail in Virginia]

You can put it in the Sched M-1 as an expense recorded on the tax return this year not deducted on the books - and even list it as depreciation. That will put it on the return as an adjustment to income, so that the change on the balance sheet will balance. I always have to play with pencil and paper to figure out which side it goes on. Good luck!

[mcb39]

You can put it in the Sched M-1 as an expense recorded on the tax return this year not deducted on the books - and even list it as depreciation. That will put it on the return as an adjustment to income, so that the change on the balance sheet will balance. I always have to play with pencil and paper to figure out which side it goes on. Good luck!

That's the best idea I heard so far. I have always had to play with pencil and paper and the M-1; probably for many years. Most of my clients aren't even required to fill that page out, but lately I like to do it because I think that is the reason that I have gotten rusty. Like I said in a previous post, I often wonder if anyone even looks at these for small or family-owned partnerships.

[OldJack]

I have never prepared a business tax return without filling out the balance sheet and reconciling book to tax. You are crazy not to do it as otherwise you may not have the correct numbers on the book or the tax return.

[Kea]

Thanks Gail. I think that worked! Everything balances & the K-1s show the proper amounts from Schedule F. Actually, I had tried putting as depreciation earlier, but on the other side (just randomly playing around with the numbers). It didn't seem right, but I also knew that I didn't know enough to decide for sure.

Thanks OldJack & Marilyn for helping me understand what I'm looking at & what I can and cannot do to a 1065.

I'm not ready to market myself as a 1065 preparer, but I might be better at looking at them than I was last week. I might be able to answer a question or 2 & MAYBE tackle a simple one.

Many thanks again to everyone. (And now I'll go back to my nice, "easy" 1040s -- until I hit another stone wall!)