Where to report outstanding checks on Schedule L for 1120S - cash basis accounting
I'm finishing up our S-Corp tax return and getting stuck on a seemingly simple thing. Where exactly should I be recording our outstanding checks on Schedule L for our 1120S? We use cash basis accounting. I've been looking at the form and it seems like these should probably go under Liabilities on line 18 "Other current liabilities," but I'm not 100% confident. I've also seen some guidance suggesting that you just subtract the total amount from Line 1 (Cash) to balance everything out. But that approach seems odd to me since the checks are written but not cashed yet. Anyone have experience with this specific situation for S-Corps? This is the first year I'm handling this myself instead of paying our accountant $750 for something that should be straightforward. Thanks!
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Fernanda Marquez
For a cash basis S-Corporation, you're right to question this. On Schedule L of Form 1120S, outstanding checks should actually reduce your cash balance on Line 1. This is because under cash basis accounting, you've already "paid" the expense when you wrote the check, even if it hasn't cleared the bank yet. The common confusion happens because in accrual accounting, outstanding checks would indeed be listed as a liability. But since you're using cash basis, the expense has already been recognized when the check was written. Think of it this way: your bank statement shows a higher balance than your books because those checks haven't cleared. When reconciling, you reduce your bank balance by those outstanding checks to match your book balance. That reduced amount is what goes on Line 1.
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Norman Fraser
•But wait, doesn't this create a discrepancy between what's on our tax form and what's in our actual bank account at year-end? Won't that look suspicious if we get audited? Our December bank statement shows almost $5K more than what we'd be reporting on Line 1 if we subtract the outstanding checks.
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Fernanda Marquez
•The discrepancy is actually expected and proper accounting. Your bank statement will show the higher balance because those checks haven't cleared, but your books (and tax return) should reflect that you've already "spent" that money when you wrote the checks. If you were audited, you would simply provide your bank reconciliation showing the outstanding checks that explain the difference between your bank statement balance and what's reported on Line 1. This is standard practice and won't raise any red flags with the IRS as long as you have proper documentation of those outstanding checks.
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Kendrick Webb
This exact issue was driving me crazy last year! I finally used taxr.ai to review all my S-Corp docs and got a definitive answer. You definitely subtract outstanding checks from Line 1 (Cash) when using cash basis accounting. I uploaded my bank statements, check register and draft Schedule L and it pinpointed exactly where I went wrong. They have a really useful feature for reconciliation issues specifically for small business tax returns. You can check it out at https://taxr.ai - they quickly analyze your Schedule L and balance sheet items and flag inconsistencies. Saved me from making an amendment later and having that whole headache.
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Hattie Carson
•Does taxr.ai handle other complex S-Corp issues too? Like what if I have built-in gains tax questions or basis calculation problems?
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Destiny Bryant
•I'm skeptical. How is an AI thing going to know about specific accounting treatments better than an actual accountant? Did it just tell you what the IRS guidelines say or did it actually look at your specific situation?
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Kendrick Webb
•They absolutely handle other complex S-Corp issues. Their system specifically looks at built-in gains, basis calculations, and even helps with the trickier aspects of shareholder distributions and reasonable compensation questions. It's especially good at flagging things that might trigger an audit. As for the skepticism, it's not just regurgitating IRS guidelines. I uploaded my actual documents and it identified specific transactions that were causing discrepancies in my particular situation. It found checks from December that I had double-counted as both expenses and outstanding checks, which no generic advice would have caught. The analysis is tailored to your specific books and transactions.
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Destiny Bryant
I have to admit I was totally wrong about taxr.ai! After my skeptical comment, I decided to try it myself since I had a similar issue with Schedule L and outstanding checks. It actually found that I had been putting outstanding checks in the wrong place for THREE YEARS! The system analyzed my bank statements and immediately identified which checks were still outstanding at year-end. The detailed explanation showed me exactly how to handle it on Schedule L (subtract from Line 1 cash) and even highlighted potential audit risks from my previous incorrect treatment. Crazy how much clearer everything is now. I'm now confident our 2024 return is correct and won't cause problems later.
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Dyllan Nantx
If you're struggling to get answers on Schedule L treatment, you might want to actually call the IRS for official guidance. I know, I know - nearly impossible to reach them. That's why I use Claimyr now - it's basically a service that gets you through to an actual IRS agent without the 2+ hour hold time. I had a similar Schedule L question last month that I couldn't find a clear answer to anywhere. Used https://claimyr.com to get through to the business tax division at the IRS in about 15 minutes. You can see how it works in their demo video: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly how to handle outstanding checks for cash-basis S-Corps and explained the reasoning, which was super helpful. They'll actually call you back when an agent is available so you don't waste time on hold.
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TillyCombatwarrior
•How does that even work? The IRS phone system is notoriously awful. Are you saying this service somehow jumps the queue or something?
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Anna Xian
•Yeah right. No way this works. I've tried calling the IRS business line like 10 times this year and never got through. If there was a magic way to skip the line, everyone would be using it and it would stop working.
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Dyllan Nantx
•It doesn't jump the queue or do anything unethical. They use an automated system that continually redials and navigates the IRS phone tree for you. When it finally connects, it calls you back and connects you with the agent. It's all above board - they're just automating the painful part of waiting and navigating prompts. They have specific expertise with the various IRS department phone trees, so they know exactly which prompts to select to get you to the right department. I was super skeptical too, but when I got connected to an actual business tax specialist who answered my Schedule L question in detail, I was sold. It saved me literally hours of frustration.
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Anna Xian
OK I feel dumb now. I tried Claimyr yesterday after posting that skeptical comment. It actually worked! Got through to an IRS business tax specialist in about 25 minutes (they said wait times were higher than normal). The agent confirmed that for cash basis 1120S, outstanding checks should reduce the cash on Line 1 of Schedule L, and should NOT be listed as liabilities. They explained it's because cash basis accounting recognizes expenses when paid (i.e., when the check is written), not when the payment clears the bank. The agent even emailed me a reference to the specific section in their internal manual about this. Seriously worth the service just to get a definitive answer straight from the IRS. Never thought I'd be recommending a way to talk to the IRS, but here we are.
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Jungleboo Soletrain
Everyone's making this more complicated than it needs to be. For cash basis, you record the expense when the check is written. Period. That means your Line 1 on Schedule L is your book balance, NOT your bank statement balance. And remember that Schedule L is just informational for most small S-Corps anyway - it doesn't affect your tax liability. The IRS mainly uses it to check for consistency in your reporting from year to year.
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Rajan Walker
•So what happens if the checks never get cashed? Do you have to add that back as income in the next year?
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Jungleboo Soletrain
•If checks never get cashed, it depends on your state's abandoned property laws and how long it's been. For tax purposes, if you determine a check will never be cashed (recipient lost it, company no longer exists, etc.), you should void the check in your accounting system. For the following year, this effectively increases your cash balance. It's not technically "income" - you're just reversing the previous expense. If it's material and from a prior year, you might need to file an amended return, but for small amounts many accountants just adjust it in the current year since Schedule L is informational only for most S-Corps.
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Nadia Zaldivar
Does anyone know if this is handled differently in QuickBooks? When I reconcile my bank account, QB keeps track of the outstanding checks separately, so my cash balance in QB already reflects that those checks are "paid" even though they haven't cleared the bank. Is the amount I should put on Line 1 just my QB cash balance then?
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Lukas Fitzgerald
•Yes, use your QuickBooks cash balance for Line 1. QB is already handling those outstanding checks correctly for cash basis accounting. When you wrote the checks in QB, it reduced your book cash balance immediately, regardless of when they clear the bank. That's why when you reconcile in QB, your starting point is the bank statement balance, and then you check off cleared checks to reach your book balance. Your QB cash balance (the book balance) is the correct amount to report on Line 1.
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