We frequently receive questions on the Bukers hotline about spreading the Schedule M-2 of Form 1120S, specifically regarding Retained Earnings Adjustments. While it is somewhat uncommon to have Retained Earnings Adjustments on the Schedule M-2, they are important items to be aware of when spreading an S Corporation tax return.

When spreading the Schedule M-2 of Form 1120S in Bukers BTA Pro, you will see instructions in red text to only enter amounts that are specifically retained earnings adjustments. The key question is “how do I know whether the additions and reductions on my tax return are retained earnings adjustments?”

To make this determination, you will need to analyze the white paper detail for Line 3 and Line 5 of the Schedule M-2. Retained Earnings Adjustments can be either positive or negative and therefore can be included on Line 3 Other Additions or Line 5 Other Reductions.

On the white paper detail, the Retained Earnings Adjustments could be listed in many different ways, but some common descriptions are “Prior Period Adjustments” or “Changes in Accounting Methods”. These are both items that can positively or negatively affect the retained earnings of the S Corporation but are not items of income or expense included in the calculation of taxable income.

Please note that most items comprising Lines 3 or 5 of Schedule M-2 will be the separately stated items of income or expense from Schedule K. Specifically, you’ll commonly see interest income or 1231 gain as an addition on Line 3 and 179 expense or charitable contributions as a reduction on Line 5. If you are unsure if the item listed in the white paper detail is a Retained Earnings Adjustment, check to see if it is a separately stated item of income or expense listed on the Schedule K. If it is an item listed on Schedule K, then it is not a Retained Earnings Adjustment and would not need to be included in your spread in Bukers BTA Pro.

If you have any further questions regarding this topic, please don’t hesitate to call our Bukers Hotline at (503) 520-1303.