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Losses in Business

Discrepancy in taxes paid on C-Corp Tax Return

Ryan asks:

On the 1120 tax return, at the bottom of page 1, it lists total tax of $29,280. However when looking at page 5, Schedule M-1, there is no Federal Income Tax listed. Is there a reason why the total tax identified from page 1 doesn’t carry forward to Schedule M-1?

In looking at Retained Earnings, it seems as though the $112,898 in Net Income is what they are balancing to so if we were to include the total tax from page 1, we would then be out of balance on our Retained Earnings analysis.

Linda says:

That is a lot of information in a lot of schedules. Ryan sent a screenshot of the return, so let me summarize first:

  1. The tax return is on cash basis.
  2. They use as net income per books the same amount as taxable income before federal taxes so I am guessing their books are on cash basis instead of accrual and on tax-basis rather than GAAP (Generally Accepted Accounting Principles).
  3. Schedule J calculates the tax, but does not show they paid it.
  4. Since their books are on the cash basis, and they did not pay the tax, they did not show it as an expense.
  5. Even though they did not pay taxes, it appears they made a significant distributions to the owners.
  6. Retained Earnings is negative


Just how behind are they on their corporate federal income taxes?

Verify that they are not paying corporate income taxes on a timely basis. Was it just a one-time mistake?

If they are not paying corporate income taxes and are basically taking all the cashflow generated from the business as distributions, what does that say about the viability of the business? What does that say about how they treat agreements with third parties like the IRS and their lender? (That would be you.)

What about the negative retained earnings?

With a negative retained earnings, consider if the loan to value is acceptable. If the fair market value of their property has dramatically improved then the loan-to-FMV my be fine, even though the loan-to-book value is not. Because assets are on the books at historical cost less depreciation, an appreciation asset that is then refinanced based on current value can force liabilities to be higher than ‘book’ assets pretty quickly.

On the other hand, if retained earnings is negative because they keep losing money, or keep taking capital distributions in excess of profits, that is a problem.

Online modules on corporations

Here are resources at our online training site for more on understanding corporations, their cash flow calculations and how to ‘read’ the Schedule L Balance Sheets:

  • Types of Entities
  • Three modules on Corporate 1120 Returns
  • Balance Sheet Basics


Click here to go to Lenders Online Training.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.