Question

all of the following regarding schedule m-2 (form 1065) are correct except

Answer 1

The following regarding schedule m-2 form 1065 are correct except

Analysis of Partners Capital Accounts

Schedule M-2 - Analysis of Partner's Capital Accounts is the section in Form 1065 - U.S. Return of Partnership Income where the partnership reports to the IRS what caused the changes to the partners' capital accounts on the partnership's books and records.

Schedule M-2 is an analysis of unappropriated retained earnings per books. Calculating Schedule M-2 is important in business because it tells your small business how much money you have available that isn't earmarked for certain uses.

When Schedule M-2 is required to be completed:

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 M-2 and submit the changes during the tax year in the partners' capital accounts as reflected on the partnership's books and records. As a practical matter, Schedule M-2 would normally not be completed until both Schedule L - (Balance Sheet) and Schedule M-1 - (Reconciliation of Income), have been completed because certain items on the Schedule M-2 must match entries that are calculated on Schedules L and M-1.

To complete a Schedule M-2, from the main menu of the tax return (Form 1065) select Schedule M-2 Analysis.

To assist in the entry of amounts on the Schedule M-2 - Analysis of Partner's Capital Accounts, each line of this menu is described below. At the Schedule M-2 Analysis of Partner's Capital Accounts Menu the user can enter the items that impact the capital accounts of the partners. The only amount that TaxSlayer Pro will automatically pull to this Schedule M-2 is the Net Income (Loss) per Books, which is reconciled to the Income (Loss) on the Tax Return on Schedule M-1.

1.  Balance at Beginning of the Year

2.  Cash Contributed

3. Property Contributed

4. Net Income (Loss) per Books

5.  Other Increases

7.  Cash Distributions

8.  Property Distributions

9.  Other Decreases

10. Balance at End of Year

11. Schedule L, Line 21 - The amount comes from the Schedule L which TaxSlayer Pro automatically

12. Schedule L, Line 21 Minus Balance at End of Year - In the event that there is a difference between discrepancy but such a discrepancy is indicative of errors in either the return or the records of the partnership.

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

Schedule M-2 - Analysis of Partner's Capital Accounts is the section in Form 1065 - U.S. Return of Partnership Income where the partnership reports to the IRS what caused the changes to the partners' capital accounts on the partnership's books and records. This section of the tax return is used by the IRS to verify the accuracy of the tax reporting because analyzing the changes to the capital accounts should be consistent with the income reporting and balance sheet (Schedule L).  The amounts on Schedule M-2 should equal the total of the amounts reported in Part II, Item L of ALL the partners' Schedules K-1's. However, not all partnerships have to do this analysis, and many smaller partnerships do not complete Schedule M-2.