How to tell if S-Corp Return (Form 1120S) is Correct?

[Michael in ABQ]

Last year my wife and I bought an ecommerce business. Long story short, we're late filing our 2021 taxes (had to fire original bookkeeper and start over) and I'm just now getting the Form 1120S and accompanying state and federal forms (K-1, 4562, etc.)

Our new bookkeeper referred us to an accounting firm for a CPA earlier this year as they didn't have enough capacity for new clients. I spoke to our new CPA earlier this year and she clearly knew her stuff and answered all my questions. I didn't realize the S-Corp filing deadline was March 15th but our previous bookkeeper claims they filed an extension. Either way, we're going to be filing late and have to write the IRS a letter requesting a waiver of penalties and interest (should be successful since it's our first year according to an IRS agent and other CPA I know). I didn't realize at the time that our CPA would not actually be preparing the return and when the preparer emailed me an initial estimate of our return it was far lower than I expected because no depreciation or amortization was included.


Fast forward a few months and I've finally got the business tax return (not the 1040 yet) and there's a bunch of mistakes and missing information. I.e., Albuquerque is misspelled, cash accounting is checked instead of accrual, etc. Some of it was due to me not providing all the information but I sent a lengthy email of line-by-line corrections (NAICS code, missing depreciation, missing amortization, loan payments made by the SBA under the CARES Act not being properly recognized, etc.). I just got the revised return, and it looks like they addressed the depreciation and that's about it.

I've spent the last few hours going line by line making comments in the PDF but now I've lost all confidence that the preparer (not the CPA, someone else in the firm) knows what they're doing - or that the CPA is actually reviewing anything. For instance, our shareholder's basis computation is basically blank despite us putting in tens of thousands of dollars in down payments, working capital, etc. The section about debt basis is also blank even though we took out an SBA loan and a seller note. There's no amortization even though 80% of the business we purchased was goodwill so we should be able to amortize that over 15 years. The SBA loan payments paid for by the CARES Act aren't addressed at all - nor is the reduction in employee expense from the Employee Retention Tax Credit.

The bottom line is a bunch of sections of various forms are blank and I don't know if that's the way it should look, or if the person preparing this is just lazy/incompetent. I already paid in full months ago but now I'm spending multiple hours reviewing and correcting their work.

[SeattleCPA]

The tax software includes diagnostics that basically prevent the accounting firm from e-filing if the return's errors are serious enough. So if it's file-able, that gives you a little assurance.

Also if you think the return is close, you can file and then amend. (I'm not really supposed to say that... but if your S corp has two owners, you're now looking at a roughly $400 per month penalty for being late. So it'd be nice to avoid more of those.)

The other thing I'd say--and I know we've PMed before about stuff and then talked in this forum and right now I don't remember every detail--but if the K-1s look close to the right number? That's maybe good enough. I.e., precision costs. And usually not what it's worth. So if you're, just by eyeballing it, within a few hundred bucks for sure, I'd probably get return filed. And then maybe you reassess everything.

P.S. S corporations get easier once you've done them a time or two.

[Michael in ABQ]

The tax software includes diagnostics that basically prevent the accounting firm from e-filing if the return's errors are serious enough. So if it's file-able, that gives you a little assurance.

Also if you think the return is close, you can file and then amend. (I'm not really supposed to say that... but if your S corp has two owners, you're now looking at a roughly $400 per month penalty for being late. So it'd be nice to avoid more of those.)

The other thing I'd say--and I know we've PMed before about stuff and then talked in this forum and right now I don't remember every detail--but if the K-1s look close to the right number? That's maybe good enough. I.e., precision costs. And usually not what it's worth. So if you're, just by eyeballing it, within a few hundred bucks for sure, I'd probably get return filed. And then maybe you reassess everything.

P.S. S corporations get easier once you've done them a time or two.

Since this was for a partial year which included a lot of startup expenses, we're currently showing a small loss on paper. So, either way we're going to get a significant return once that flows through to our personal return (6 kids - lots of tax credits).

The actual numbers don't look that far off. Our revenue number and COGS are solid - it's the stuff like not accounting for about $10k worth of other income from the CARES Act paying the first three months of our SBA Loan - but then also counting the interest payments for that loan which we didn't make the first 3 months. I don't care about missing a few hundred dollars in expenses - but checking cash vs. accrual for an inventory-based business where all of our financial statements say Accrual is not instilling a lot of confidence.

[SeattleCPA]

...checking cash vs. accrual for an inventory-based business where all of our financial statements say Accrual is not instilling a lot of confidence.

I would have guessed you'd use cash accounting with the inventory treated as nonincidental supplies. I wonder if it's possible that's what they/you did.

In that situation, I think what the software probably does is apply cash basis accounting methods in general--but then only write off inventory when it's sold.

For what it's worth, doing true accrual basis accounting would be a lot of work. E.g., accruing payroll, PTO, interest on notes and other expenses you've incurred but which haven't hit cash yet and so aren't in the books... then deferring bits of expense that you've paid but which you actually haven't incurred yet. Usually true tax accrual basis returns are more work than they're worth for a small firm. Also default rule is you use cash up to $25,000,000 in revenues.

[SeattleCPA]

The tax software includes diagnostics that basically prevent the accounting firm from e-filing if the return's errors are serious enough. So if it's file-able, that gives you a little assurance.

Also if you think the return is close, you can file and then amend. (I'm not really supposed to say that... but if your S corp has two owners, you're now looking at a roughly $400 per month penalty for being late. So it'd be nice to avoid more of those.)

The other thing I'd say--and I know we've PMed before about stuff and then talked in this forum and right now I don't remember every detail--but if the K-1s look close to the right number? That's maybe good enough. I.e., precision costs. And usually not what it's worth. So if you're, just by eyeballing it, within a few hundred bucks for sure, I'd probably get return filed. And then maybe you reassess everything.

P.S. S corporations get easier once you've done them a time or two.

Since this was for a partial year which included a lot of startup expenses, we're currently showing a small loss on paper. So, either way we're going to get a significant return once that flows through to our personal return (6 kids - lots of tax credits).

The actual numbers don't look that far off. Our revenue number and COGS are solid - it's the stuff like not accounting for about $10k worth of other income from the CARES Act paying the first three months of our SBA Loan - but then also counting the interest payments for that loan which we didn't make the first 3 months. I don't care about missing a few hundred dollars in expenses - but checking cash vs. accrual for an inventory-based business where all of our financial statements say Accrual is not instilling a lot of confidence.

Michael, I should have mentioned something else in my message originally. Which is this. Of course there is a fast way (or should be) a fast way to check your 1120S. The 1120S Schedule L (a few pages into the actual return) is supposed to show your book balance sheets at start and end of year. So you can make that comparison. There's a place where the tax return should match your accounting.

And then there's an M-1 schedule (right after the balance sheets) that reconciles your book income to the tax return's income. E.g., if your book profit and loss statement shows a profit of $10,000 and the tax return shows a loss of $10,000, that M-1 reconciliation will explain how a $10K profit turns into a $10K loss. And assuming that explanation is provided, you'll know all the numbers from your accounting system got "into" your return.

[Michael in ABQ]

I finally got some emails directly from my CPA. Basically, she said the preparer screwed up and she wasn't checking it as close as she should have. Her assistant setup a phone call Monday morning and I sent over some additional stuff so hopefully between those two things we can get everything wrapped up and all my questions answered.

I finally got my 941-X forms that I will be mailing off to the IRS to claim the Employee Retention Tax Credit (ERTC) from Q3 of last year. I was hoping to get Q4 as well but apparently, they changed the law or regulation at the last minute and so I can only claim 70% of W-2 employee payroll for Q3. Still a few thousand dollars that I'll happily take. Hopefully their backlog has died down a bit as it's later in the year but I'm still expecting a few months.

Although as I was typing this up, I noticed some errors on the 941-X. The box wasn't checked indicated that we are a recovery startup business (RSB). That may mean that we are still eligible for ERTC in Q4. That would be nice as it's a few thousand dollars more that I was counting on last year when we decided to hire an employee and pay via W-2 rather than 1099.

[SeattleCPA]

Recovery startup business ercs work for q4 too.

[Michael in ABQ]

I spent an hour-and-a-half on the phone with our CPA and we basically went through all the issues and discovered a few others. She's making the corrections now and it sounds like the guy who originally prepared just did a lazy half-ass job. The 941-X is also being revised to add Q4.

[SeattleCPA]

I spent an hour-and-a-half on the phone with our CPA and we basically went through all the issues and discovered a few others. She's making the corrections now and it sounds like the guy who originally prepared just did a lazy half-ass job. The 941-X is also being revised to add Q4.

Good news on the Q4 RSB ERC! Yeah!

BTW, not to make excuses because it seems like you got a bad return, but this year and the previous one have been really tough on the tax accountants. Everybody is short staffed. The WFH thing degrades productivity and quality in many cases. There's been a couple of tidal waves of tax stuff CPAs should have learned but often didn't have time for. In short, it's been brutal for a lot of people. Especially people who maybe got sick or had family sick.

And now I'll stop playing the violin music.

[Michael in ABQ]

I spent an hour-and-a-half on the phone with our CPA and we basically went through all the issues and discovered a few others. She's making the corrections now and it sounds like the guy who originally prepared just did a lazy half-ass job. The 941-X is also being revised to add Q4.

Good news on the Q4 RSB ERC! Yeah!

BTW, not to make excuses because it seems like you got a bad return, but this year and the previous one have been really tough on the tax accountants. Everybody is short staffed. The WFH thing degrades productivity and quality in many cases. There's been a couple of tidal waves of tax stuff CPAs should have learned but often didn't have time for. In short, it's been brutal for a lot of people. Especially people who maybe got sick or had family sick.

And now I'll stop playing the violin music.

It's a decent sized firm so our CPA is not doing everything. I.e. there's someone doing the 941-X that knows payroll, there was someone different working on the tax prep which is a fair amount of just copy and paste from the information I sent over. However, I received a revised return direct from our CPA a few hours later and the only remaining issues were very minor - mostly waiting on the revised figures from the 941-X as that decreases how much payroll expense we can claim which will flow through the return and result in a higher net income.

It's definitely very different from past years where I could figure out on January 1st within a pretty small margin of error what our total income was and what our refund would be - having just W-2 income and some side hustles on a schedule C.