Form 1065 – Schedule L – Balance Sheets per Books – Keystone Support Center (2024)

Looking to complete a balance sheet for your client? Read on to learn more.

Schedule L – Balance Sheets per Books is the section in Form 1065 – U.S. Return of Partnership Income where the partnership reports to the IRS their Balance Sheet as found in the partnership’s books and records. The format that is used for reporting Schedule L will follow basic accounting principles for completing a balance sheet. The information that goes on the balance sheet is obtained from the partnership’s books and records and it is not generated by the tax return.

The Balance Sheet is a financial statement of the partnership that represents (as of the first and last day of the tax year), the dollar value recognized on the partnership’s books of all of the partnership’s Assets, all of the amounts owed by the partnership (Liabilities), and the amount which comprises the difference between the assets and liabilities, which is the total of all of the individual partners’ equity or investment in the partnership (Partners Capital). Basically, a Schedule L – Balance Sheet contains the Assets which equals the Liabilities and Equity (or Capital Accounts) that existed in the partnership on the first and last day of the tax year. When completing a balance sheet the method of accounting (Cash or Accrual) that the partnership uses may impact the entries that are contained on the Schedule L.

This section of the tax return is used by the IRS to verify the accuracy of the tax reporting because analyzing the changes from the beginning to ending balances recorded in the Balance Sheet should be consistent with the income being reconciled on Schedule M-1 and the partners’ capital accounts being analyzed on Schedule M-2. These three schedules are inter-connected and a change or adjustment to one of these schedules can affect the other schedules. The Balance Sheet also contains information that would indicate to the IRS that certain income items or deductions should be present on the tax return. However, not all partnerships have to submit a balance sheet, and many smaller partnerships do not complete Schedule L.

When Schedule L is NOT required to be completed:

A partnership has to complete a Schedule L (Balance Sheet); Schedule M-1 (Reconciliation of Income) and Schedule M-2 (Analysis of Partner’s Capital Accounts) unless it can satisfy ALL of the following four requirements:

  • The partnership’s total receipts were less than $250,000 for the tax year,
  • The partnership’s total assets were less than $1 million at the end of the tax year,
  • Schedule K-1’s are filed with the return and furnished to the partners on or before the due date (including extensions),
  • The partnership is not filing or required to file Schedule M-3.

If the partnership satisfies these four requirements, the taxpayer will answer ‘YES’ to the Question “Does This Partnership Meet All Four Requirements?” and the partnership would not complete a Schedule L.

This question can be accessed in Keystone Tax Solutions Pro from the main menu of the 1065 return by selecting ‘Schedule B’, then changing the answer to the Question on Schedule B (Form 1065), Line 4 (prior to the 2018 tax year, this question was listed on Schedule B (form 1065), Line 6), “Does This Partnership Meet All Four Requirements?” to ‘YES’. This question is defaulted to a ‘NO’ answer in the program and the user must affirmatively change the answer to ‘YES’ to electronically file the return without including a Schedule L (Balance Sheet), Schedule M-1 (Reconciliation of Income) and Schedule M-2 (Analysis of Partners’ Capital Accounts).

When Schedule L is required:

If the partnership does NOT meet the four requirements set forth in Schedule B (Form 1065), Line 4, the partnership is required to complete Schedule L and enter the balance sheet as reflected on the partnership’s books and records. In the event that there are any differences between the balance sheet contained in the books and records of partnership and balance sheet submitted on Schedule L, those differences should be explained in an attached statement with the tax return. As a practical matter, Schedule L – (Balance Sheet) should be entered before attempting to complete either Schedule M-1 (Reconciliation of Income) or Schedule M-2 (Analysis of Partners’ Capital Accounts) because certain items calculated on those schedules reconcile with items on the balance sheet.

At the Schedule L Balance Sheets per Books Menu the user can enter most of the balance sheet items directly from the partnership’s records. However, certain amounts Keystone Tax Solutions Pro will automatically pull to the Schedule L from other sections of the Form 1065 since those balance sheet items have previously been entered elsewhere on the tax return. To assist in the entry of the Schedule L, the two sections of the balance sheet menu, the Asset Menu and the Liabilities and Capital Menu are discussed below.

To complete the Schedule L, from the main menu of the tax return (Form 1065) select Schedule L – Balance Sheets. The first section of the Schedule L, the Asset Menu, will open. It contains all of the asset categories that are reported on the Schedule L. If the previous year tax return was done in Keystone Tax Solutions Pro and it included a Schedule L – (Balance Sheet), all of the beginning account balance amounts will pull from last year’s ending account balances. Otherwise, the beginning amounts for each asset, liability and partners’ capital will need to be entered.

Asset Menu – At this menu ALL of the assets of the partnership are either entered or pulled from other sections of the tax return. To assist in the entry of the amounts on this section of the Balance Sheet, each line of the Asset Menu is described below.

1. Cash – In this section, the user enters the beginning and ending total of all cash accounts of the partnership. This entry includes all cash and cash equivalent accounts such as bank accounts, money markets and/or certificates of deposit. It also includes any cash on hand or petty cash accounts. The beginning and ending cash entries are reported on Line 1, Columns (b) & (d) of Schedule L.

2. Accounts Receivable – This item represents any unpaid amount that clients of the partnership are legally obligated to pay for the goods and/or services that they received from the partnership. This entry would normally only be made for entities using accrual accounting because the underlying revenue that generated the receivables was recognized by the partnership. When entering the Accounts Receivable ending balance, a supporting schedule may be created to delineate the receivable amount, but this supporting statement is not mandatory to file the return. The beginning and ending accounts receivable entries are reported on Line 2a, Columns (b) & (d) of Schedule L.

3. Less Bad Debt Allowance – This balance represents the reserve or allowance that has been made to account for the fact that some of the accounts receivables will not be collected. This amount will offset a portion of the entry made for Accounts Receivables. This entry would only be made for entities using accrual accounting and a supporting schedule may be created to delineate the ending bad debt amount. The beginning and ending bad debt amounts are reported on Line 2b, Columns (a) & (c) of Schedule L. The Net Amount of the Accounts Receivables and Less Bad Debt Allowance is reported on Line 2b, Columns (b) & (d) of Schedule L.

4. Inventories – In this section the beginning and ending inventory amounts entered on Form 1125-A – (Cost of Goods Sold) are automatically pulled to the Schedule L. Adjustments to the ending inventory balance can be made on this menu, and any adjustment made in this section will automatically carry back to Form 1125-A. The beginning and ending inventory amounts are reported on Line 3, Columns (b) & (d) of Schedule L. See: Form 1125-A – Cost of Goods Sold.

5. U.S. Obligations – This entry is for any debt instrument, such as U.S. Treasury Notes or Bonds, that are guaranteed by the full faith and backing of the United States, that is owned by the partnership. These investments are considered to be a risk free asset and are separately stated on the Schedule L. The beginning and ending amounts are reported on Line 4, Columns (b) & (d) of Schedule L.

6. Tax-Exempt Sec – In this section any state and local government obligations that are considered excludable from gross income are entered. This also includes any mutual fund or other similar investment that distributes tax exempt interest or dividends. The beginning and ending amounts are reported on Line 5, Columns (b) & (d) of Schedule L.

7. Other Current – In this section the user will itemize any other current asset that has not been entered on this Asset Menu on Lines 1 through 6. Current assets are any asset that is cash or can be readily converted to cash within twelve months, and all of the assets entered above are considered to be current assets. Examples of an Other Current Asset include, a marketable security such as a publicly traded stock because it can be sold easily and converted to cash within a twelve month period, or any short term loans that the partnership has made to a non-related party.

Upon entering this field, the user should select ‘NEW’ and then enter a description of the Other Current Asset and then enter the beginning and ending balance amounts. These ‘Other Current Assets’ are required to be itemized on a statement attached to the tax return and they are reported on Line 6, Columns (b) & (d) of Schedule L.

8. Loans to Partners – In this section, the beginning and ending balances of any loans to the partners, or any person related to the partner, are entered. Generally, persons related to the partner are spouses, siblings, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). See: Section 267(b) and 707(b) of the Internal Revenue Code. When entering the Loan to Partners ending balance, a supporting schedule may be created to delineate the amount, but this supporting statement is not mandatory for filing the return. The beginning and ending amounts are reported on Line 7a, Columns (b) & (d) of Schedule L.

9. Mortgage & Real Estate Loans – This section represents any real estate loans or mortgages that the partnership made to third parties. When entering the ending balance, a supporting schedule may be created to delineate the amount, but this supporting statement is not mandatory for filing the return. The beginning and ending amounts are reported on Line 7b, Columns (b) & (d) of Schedule L.

10. Other Investments – In this section, the user will itemize any other investment assets (which could include an ownership positions in another business entity). Upon entering this field, the user should select ‘NEW’ and then enter a description of the other investment asset and then enter the beginning and ending balance amounts. These ‘Other Investment Assets’ are required to be itemized on a supporting statement attached to the tax return and they are reported on Line 8, Columns (b) & (d) of Schedule L.

11. Buildings & Other Depreciable Assets – In this section, the beginning cost or original basis amount for any buildings or other depreciable property (vehicles, machinery, etc.) used in the partnership’s business are entered (unless it is automatically pulled from last year’s return). An ending balance amount should automatically pull from the tax return, and it consists of the cost basis amounts from all of the entries that generated depreciation in the tax return and then carried that information to Form 4562 – Depreciation. Although adjustments to the ending depreciable asset balance can be made on this menu; any adjustment made on the Balance Sheet do not carry to the other sections of that tax return where the underlying depreciable asset was entered. The beginning and ending Building and Other Depreciable Asset amounts are reported on Line 9a, Columns (a) & (c) of Schedule L.

12. Less Accumulated Depreciation – In this section, the beginning Accumulated Depreciation for any buildings and/or other depreciable property used in the partnership is entered (unless it is automatically pulled from last year’s return). An ending balance amount automatically pulls from the depreciation entries made in the tax return that carried to Form 4562 – Depreciation. The amount that pulls to this ending Accumulated Depreciation balance consists of the total accumulated depreciation on ALL of the depreciable assets that have been entered in the tax return. The beginning and ending Accumulated Depreciation amounts are reported on Line 9b, Columns (a) & (c) of Schedule L. The Net Amount of the Building and Other Depreciable Assets Less the Accumulated Depreciation is reported on Line 9b, Columns (b) & (d) of Schedule L.

It is not uncommon for adjustments to occur to the accumulated depreciation amount because the partnership is permitted to use accelerated, special and/or bonus depreciation on the tax return. The partnership may use a less accelerated depreciation method such as straight line on their accounting records (books) resulting in the difference between the tax return and the book records depreciation amounts. This difference is shown in the current year with respect to this year’s income (loss) on the Schedule M-1 – Reconciliation of Income (Loss).

Keystone Tax Solutions Pro does not track the accumulated impact of any adjusting entries to the ending accumulated depreciation amount, and it is the responsibility of the preparer/accountant to track any adjustments that are made to the accumulated depreciation balance from year to year. Although adjustments to the ending accumulated depreciation balance can be made on the Balance Sheet; any adjustment made in this section will not carry to the tax return where the underlying depreciable asset was entered.

13. Depletable Assets – In this section, the beginning and ending amounts for any asset subject to Depletion are entered. These amounts must be entered directly on the Balance Sheet and do not pull from any other section of the tax return. The beginning and ending Depletable Asset amounts are reported on Line 10a, Columns (a) & (c) of Schedule L.

14. Less Accumulated Depletion – In this section, the beginning and ending Accumulated Depletion for any Depletable Asset are entered. The beginning and ending Accumulated Depletion amounts are reported on Line 10b, Columns (a) & (c) of Schedule L. The Net Amount of the Depletable Assets Less the Accumulated Depletion is reported on Line 10b, Columns (b) & (d) of Schedule L.

15. Land – In this section, the beginning and ending amounts of any land owned by the partnership are entered. If land is entered in the depreciation module in any other section of the tax return as a non-depreciable asset, those amounts will automatically pull to the ending balance amount. Although adjustments to the ending land balance can be made on this menu; any adjustment made in this section will not carry to the sections of that tax return where the land amount was entered as a non-depreciable asset. The beginning and ending amounts are reported on Line 11, Columns (b) & (d) of Schedule L.

16. Intangible Assets – In this section, the beginning and ending amounts for any Intangible Assets subject to amortization are entered. If an Intangible Asset was entered in the depreciation module in any other section of the tax return as an asset subject to amortization, those asset amounts will automatically pull to the ending balance amount. Although adjustments to the ending Intangible Asset balance can be made on this menu; any adjustment made in this section will not carry to the sections of that tax return where the Intangible Asset was entered as an asset subject to amortization. The beginning and ending Intangible Assets amounts are reported on Line 12a, Columns (a) & (c) of Schedule L.

17. Less Accumulated Amortization – In this section the beginning and ending Accumulated Amortization for any Intangible Asset subject to amortization are entered (unless it is automatically pulled from last year’s return). An ending balance amount automatically pulls from the entries made in the tax return that calculated amortization. The amount that pulls to this ending Accumulated Amortization balance consists of the total accumulated amortization on ALL of the intangible assets that have been entered in the tax return that are subject to amortization. The beginning and ending Accumulated Amortization amounts are reported on Line 12b, Columns (a) & (c) of Schedule L. The Net Amount of the Intangible Assets Less the Accumulated Amortization is reported on Line 12b, Columns (b) & (d) of Schedule L.

18. Other Assets – In this section the user will itemize any Other Asset not otherwise reported. Upon entering this field, the user should select ‘NEW’ and then enter a description of the Other Asset and then enter the beginning and ending balance amounts. These ‘Other Assets’ are required to be itemized on a supporting statement attached to the tax return and they are reported on Line 13, Columns (b) & (d) of Schedule L.

19. Total Assets – This is a calculated amount by Keystone Tax Solutions Pro, consisting of ALL of the amounts entered (or automatically pulled) on this Asset Menu. Total Assets are reported on Line 14, Columns (b) & (d) of Schedule L.

20. Total Liabilities and Capital – This line contains the calculated total from the Liabilities and Partners Capital Menu, which the user can access in this section. The Total Liabilities and Capital amounts is reported on Line 22, Columns (b) & (d) of Schedule L. When the Balance Sheet is completed, the amounts reported on Line 14 as Total Assets and on Line 22 as Total Liabilities and Partners Capital should match.

Liabilities and Capital Menu – At this menu ALL of the Liabilities of the partnership and the Partner’s Capital are entered. Only the beginning balances will automatically pull from last year’s return in this Menu. To assist in the entry of the amounts on this section of the Balance Sheet, each line of the Liabilities and Capital Menu is described below.

1. Accounts Payable – This item represents the amount that the partnership owed at the beginning and end of the year to vendors for products and services purchased on credit. The beginning and ending amounts for Accounts Payable are reported on Line 15, Columns b & d of Schedule L.

2. Mortgages, Notes < 1yr – This item represents the amount that the partnership owed at the beginning and end of the year on any mortgage or loan that is due in the next twelve months. This is the short term or current portion of such loans because the partnership will have to make these loan payments in the next year. The beginning and ending amounts for Mortgages, Notes Payable in less than 1 year are reported on Line 15, Columns (b) & (d) of Schedule L.

3. Other Current Liabilities – In this section, the user will itemize any other Current Liability that has not been entered on this Liabilities and Capital Menu on Lines 1 and 2. Current liabilities are any liability that is due within twelve months that the partnership is legally obligated to pay. Upon entering this field, the user should select ‘NEW’ and then enter a description of the item and then enter the amount. These ‘Other Current Liabilities’ are required to be itemized on a supporting statement attached to the tax return. These other current liabilities are reported on Line 17, Columns (b) & (d) of Schedule L.

4. Nonrecourse Loans – In this section, the user enters the beginning and ending balances of any nonrecourse loans. A nonrecourse loan is any obligation of the partnership for which the individual partners are not liable or can be held personally responsible. These nonrecourse loans are reported on Line 18, Columns (b) & (d) of Schedule L.

5. Loans from Partners – In this section, the beginning and ending balances of any loans from the partners or any person related to the partner are entered. Generally, persons related to the partner are spouses, siblings, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). See: Section 267(b) and 707(b) of the Internal Revenue Code. When entering the Loan from Partners’ ending balance, a supporting schedule may be created to delineate the amount, but this supporting statement is not mandatory for filing the return. The beginning and ending amounts are reported on Line 19a, Columns (b) & (d) of Schedule L.

6. Mortgages, Notes > 1yr – This item represents the amount that the partnership owed at the beginning and end of the year on any mortgage or loan that is payable more than one year in the future. This is the long term portion of such loans because the partnership will not have to make these loan payments in the next year. The beginning and ending amounts for Mortgages, Notes Payable in more than 1 year are reported on Line 19b, Columns (b) & (d) of Schedule L.

7. Other Liabilities – In this section, the user will itemize any other liability that has not been entered on this Liabilities and Capital Menu. Other liabilities are any liability that are not due within twelve months. Upon entering this field, the user should select ‘NEW’ and then enter a description of the item and then enter the amount. These ‘Other Liabilities’ are required to be itemized on a supporting statement attached to the tax return. These other liabilities are reported on Line 20, Columns (b) & (d) of Schedule L.

8. Partners’ Capital – The beginning partners’ capital account should match the total of the beginning capital accounts entered in Part II, Item L of the Schedule K-1 (Form 1065) – Partner’s Share of Income, Deductions, Credits, etc. from All the partners’ K-1’s.

This ending balance entry should match the amount that is calculated on Schedule M-2 – Analysis of Partners’ Capital Accounts, Line 9. (To assist in the preparation of the Schedule M-2, this amount is automatically pulled, as a reference amount, to the Schedule M-2 – Analysis of Partners’ Capital Accounts Menu.) The ending balance amount should also match the Total of the ending capital accounts entered in Part II, Item L of All of the partner’s K-1’s. See: Form 1065 – Schedule M-2 – Analysis of Partners’ Capital Accounts.

9. Total Liabilities and Capital – This is a calculated amount by the tax program consisting of the amounts entered (or the beginning balances automatically pulled) on this Liabilities and Capital Menu. The Total Liabilities and Capital amounts is reported on Line 22, Columns (b) & (d) of Schedule L. When the Balance Sheet is completed, the amounts reported on Line 14 as Total Assets and reported as Total Liabilities and Partners Capital on Line 22 should match.

10. Total Assets – This is a calculated amount by the tax program consisting of all of the amounts entered (or automatically pulled) on the Asset Menu. This total is reported on Line 14, Columns b & d of Schedule L. The Total Liabilities and Capital amounts are reported on Line 22, Columns (b) & (d) of Schedule L. When the Balance Sheet is completed, the amounts reported on Line 14 as Total Assets, and on Line 22 as Total Liabilities and Partners Capital, should match.

11. Difference – This is a calculated amount by the tax program consisting of the difference between the calculated Total Assets and the calculated Total Liabilities and Capital. This is the amount, if any, that the Balance Sheet is considered out of balance. A warning will also be provided when exiting the Schedule L Menu stating “Total Assets Do Not Equal Liabilities & Capital. Do you wish to continue working on the balance sheet?” The IRS will accept a tax return electronically filed with a Schedule L that does not balance. However, such a return is an indication that errors may exist in either the tax return, the partnership’s books or both.

NOTE: This is a guide on entering Form 1065 – U.S. Return of Partnership Income, Schedule L – Balance Sheet per Books into Keystone Tax Solutions Pro. This is not intended as tax advice.

Additional Resources:

Publication 541 – Partnerships

Instructions for Form 1065 – U.S. Return of Partnership Income

Creating a Basic Form 1065 – U.S. Return of Partnership Income

Form 1065 – Schedule M-1 – Reconciliation of Income (Loss) per Books With Income (Loss) per Tax Return

Form 1065 – Schedule M-2 – Analysis of Partners’ Capital Accounts

Form 1065 – Schedule L – Balance Sheets per Books – Keystone Support Center (2024)
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