Where does the capital stock number on Schedule L come from?

Multiply the shares issued by the par value, both of which are in the articles of incorporation. A common Delaware setup is 1,000,000 shares at $0.0001 par, which is $100 of capital stock. If the shareholder contributed $28,000, the equity section shows $100 of capital stock and $27,900 of additional paid-in capital. The contribution does not all land on one line.

Why do I need the W-2s if I already have the financial statements?

Because Form 1120S reports compensation of officers separately from salaries and wages, and the books usually have one account for both. The W-2s tell you what each person was paid and the operating agreement tells you who the officers are. The W-3 is worth requesting too, since it totals every W-2 the company issued and gives you something to reconcile the books against.

Do I need to attach Form 2553 to the first return?

It is not required but it is cheap insurance. If the IRS has no record of the S election on file, and that does happen, having the form attached as a PDF to the e-filed return saves a correspondence cycle. If the client never actually filed a 2553 and only believes they are an S corp, you want to discover that in January.

The S election took effect mid year. Does that change the return?

Yes. If the election was effective November 12, the return covers November 12 through December 31 rather than the full calendar year. That is a short year, and the fiscal year begin and end dates have to be entered rather than left at the calendar default. Drake raises a diagnostic saying the election date occurs after the start of the tax year, and entering the real dates clears it.

Should I complete Schedule L if the S corp is under the threshold?

Yes, in almost every case. When receipts and assets are under the thresholds the balance sheet is not required and Drake will not print it unless you turn on the force print option. But every year you skip it is a year with no beginning balances for the following year, and when the client sells the business or grows past the threshold someone has to reconstruct all of it from records that may no longer exist.

First Year S Corp Return: What to Ask the Client For

A client calls in January. They set up an LLC last year, filed an S election, and now they need a 1120S. What do you need from them?

Most preparers answer "send me your financials" and then spend the next three weeks emailing back and forth for everything else. Below is the list I'd send instead, and more importantly, what each document is actually for. Once you know why you're asking, the follow-up questions mostly disappear.

The five documents needed for a first year S corp return and what each one provides, including the shares times par value calculation for capital stock

Articles of incorporation

This is the formation document from the state. You need three obvious things off it and one that surprises people.

The obvious ones are the date of incorporation, the state, and the registered address. Date of incorporation goes on page 1 of the return, and it matters more than it looks like it does, which I'll come back to.

The surprising one is the stock. Corporations issue shares, and the articles will tell you how many and at what par value. Multiply the two together and you have the number that goes on the capital stock line of Schedule L.

A very common Delaware setup is 1,000,000 shares authorized at $0.0001 par value. That's $100 of capital stock. Not $1,000,000, and not zero, which are the two answers people usually guess at when nobody told them where the figure comes from.

If the shareholder put $28,000 into the business, your equity section is $100 of capital stock and $27,900 of additional paid-in capital. The contribution doesn't all land in one line.

Form 2553

This is the S election itself, and you want a copy for two reasons.

First, it gives you the effective date of the election. Second, on a first-year return, attaching it as a PDF to the e-filed return is cheap insurance. If the IRS has no record of the election on file, and that happens more than you'd like, the return has documentation attached to it from day one.

If the client never filed a 2553 and thinks they're an S corp because someone told them they were, better to find that out in January than in March. Prepare the form and get it sent.

The operating agreement

For an LLC electing S corp treatment, the operating agreement tells you who the members are, what each one contributed, and the ownership percentages.

Ownership drives the K-1 split, so you need it in writing rather than from memory. Usually the contribution percentages and the profit and loss split match, but not always, and the agreement is where you'd find out.

It also names the managing member, which tells you who signs the return.

W-2s, the W-3, and payroll reports

This is the one that gets skipped, and it's the one that changes the return.

Say the books show $30,000 in salaries and wages. On an 1120S, compensation of officers is a separate line from salaries and wages, so that single account has to be split before it goes on the return. The W-2s tell you what each person was paid, the operating agreement tells you which of them are officers, and between the two you can pull the officer compensation out.

In the example above, if the shareholder's W-2 shows $20,000, then officer compensation is $20,000 and salaries and wages for everyone else is $10,000.

I'd ask for the W-3 too. It shows total wages the company reported for the year, which gives you something to reconcile the books against. If the books say $30,000 and the W-3 says $38,000, something is missing and you want to know before you file, not after a notice shows up.

The financial statements

Profit and loss plus the balance sheet, ideally with a general ledger if the balance sheet has anything unusual in it.

Two things to expect when you open them.

The books are probably missing depreciation. Somebody bought $5,000 of equipment and expensed it, or capitalized it and never depreciated it. Either way the return needs a depreciation entry, and the client's books need to be corrected. That's a book adjustment, and it's worth sending back to the bookkeeper so next year starts clean instead of drifting further.

Meals will need splitting. The 50 percent limitation is not a book adjustment. The books are correct at the full amount, and the disallowed half is a book to tax difference that shows up on Schedule M-1. Those two things get conflated constantly, and the difference matters: if you cut the meals expense in half on the books, the financial statements are wrong and the AAA is wrong.

So you end up with book income, then adjusted book income after the entries the bookkeeper missed, then taxable income after the book to tax differences. Three numbers, and Schedule M-1 is where you show the walk from the second to the third.

Two things worth confirming while you're asking

What state are they operating in? Delaware incorporation with a California office is extremely common, and it means a California filing regardless of where the entity was formed. Incorporation state and operating state are separate questions and you want both answers.

When did the S election take effect? If it was mid-year, say November 12, you don't have a full calendar year. That produces a short year, and the return needs fiscal year begin and end dates entered rather than defaulting to January through December. Drake will throw a diagnostic about the election date occurring after the start of the tax year, and the fix is to go back to the general information screen and enter the actual dates.

This is the single most common first-year 1120S diagnostic, and it comes straight from the incorporation date you pulled off the articles.

Where the balance sheet lands

For a first year the beginning column is all zeros, which is the one nice thing about a first-year return. The ending column comes from the client's balance sheet with the capital stock adjustment described above.

You may find Schedule L doesn't print at all. If total receipts are under $250,000 and total assets are under $250,000, it isn't required, and Drake won't produce it unless you tell it to. There's a force print option on the assets and liabilities screen.

Turn it on. Every year you skip the balance sheet is a year with no beginning balances for the year after, and when the client eventually sells the business or crosses the threshold, somebody has to reconstruct all of it from records that may not exist anymore. Doing it now takes twenty minutes. Doing it in four years takes a weekend.

Getting the books to the return

Everything above is about collecting inputs. The work that follows is turning a trial balance into a return, and for a first-year S corp that means splitting officer compensation out of wages, posting the depreciation the bookkeeper missed, keeping the meals disallowance on M-1 instead of in the books, and getting the equity section split between capital stock and paid-in capital.

That's the part Ledger IQ handles. You upload the trial balance the client sent, and each account gets mapped to a real line on the return, with compensation of officers and salaries and wages as separate destinations so the split is explicit rather than something you remember to do. Adjusting entries post against the trial balance with references, and tax-only items like the meals disallowance get recorded as tax journal entries with their own M-1 offset, so the book column stays true to the client's financials.

The Working Trial Balance then shows unadjusted, adjusted, and tax basis side by side with an income proof underneath, which is the same walk from book income to taxable income that Schedule M-1 reports. When that ties, what you're entering into Drake is already reconciled.

Next year the mapping is still there, so the second-year return starts from the decisions you made on the first one.

Running a first year S corp through Ledger IQ

Upload the trial balance the client sent. Excel or a QuickBooks export both work, and you do not need to reformat it first.
Map the accounts to return lines. Compensation of officers and salaries and wages are separate destinations, so the split you worked out from the W-2s gets recorded rather than remembered.
Post the depreciation the bookkeeper missed as an adjusting entry. It carries a reference, lands in the adjustments column, and comes out in a journal entry report you can send back so next year opens clean.
Record the meals disallowance as a tax journal entry with its own M-1 offset. The book column keeps agreeing with the client financial statements while the difference sits where Schedule M-1 wants it.
Split the equity section, capital stock at shares times par and the balance to additional paid-in capital, so Schedule L is right the first year instead of being inherited wrong for the next five.
Check the income proof at the bottom of the Working Trial Balance. It walks net income per books through the differences to ordinary business income, which is what page 1 and box 1 of the K-1 should say.
Export to Drake and enter a return that is already reconciled.

Supports Forms 1065, 1120S and 1120, with exports for Drake, Lacerte and UltraTax CS. The walkthrough is in the Drake Tax resource guide, and it is free during early access, so you can start at portal.ledgeriq.ai and run this on a live client without a credit card.