Supplement:

Corporations (1120)

Support.DrakeSoftware.com | 828.524.8020
 Drake Tax
User’s Manual
Tax Year 2016

Supplement: Corporations
(1120)

Support.DrakeSoftware.com
(828) 524-8020
 Drake Tax Manual Supplement: Corporations

Copyright
The 2016 Drake Tax User’s Manual Supplement: Corporations, Drake Tax Software,
and any other related materials are copyrighted material. All rights are reserved by
Drake Enterprises, LTD, including all ownership rights. This document, associated
software, and related material are the property of Drake Enterprises, LTD.

Drake Enterprises, LTD, hereby authorizes you to download, display, print, and repro-
duce the material in this document in an unaltered form only for your personal, non-
commercial use or for non-commercial use within your organization. Copyright,
trademark, and other proprietary notices may not be removed.

© 2016 Drake Enterprises, LTD. All rights reserved.

While every attempt has been made to produce an accurate and complete manual,
there is no warranty, expressed or implied, to that effect. Drake Enterprises, LTD,
assumes no liability for damages or claims resulting from the use of the information
contained herein.

Trademarks
The Drake Software Logo and Drake Tax are registered trademarks of Drake
Enterprises, LTD.
Microsoft® and Windows® are either registered trademarks or trademarks of
Microsoft Corporation in the United States and other countries.
Other product names mentioned in this manual may be trademarks or registered
trademarks of their respective companies.

iv Tax Year 2016

Drake Tax Manual Supplement: Corporations

Table of Contents

What’s New in Drake Tax for Corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Security Screen in the Business Packages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
K-1 Export to all Packages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Oil and Gas Depletion Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Foreign Tab . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Practice Management Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Before You Start . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Updating a Prior-Year Return in Drake Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Converting from Another Return Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Filing Form 1120-C or 1120-H. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Header Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Name and Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Tax Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Boxes A through E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Income and Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Gross Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Cost of Goods Sold (Form 1125-A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Dividends (Schedule C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Rents and Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Ordinary Gains and Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Compensation of Officers (Form 1125-E) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Salaries and Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Repairs and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Bad Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Taxes and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Charitable Contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Depletion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Pension and Profit-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Employee Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Domestic Production Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Other Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
NOL Carrybacks and Carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Tax, Refundable Credits, and Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Total Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Form 3800. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Estimated Taxes and Applied Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Estimated State Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Tax Year 2016 v

 Drake Tax Manual Supplement: Corporations

Direct Deposit of Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Electronic Funds Withdrawal (Direct Debit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Program Defaults and Overrides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Required Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Withdrawal from Multiple Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Filing an Extension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Signing the Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Amending a Return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Schedule K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Schedule K, Line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Schedule K, Line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Schedule K, Line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Schedule K, Line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Schedule K, Line 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Schedule K-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
K-1 Export . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
State-Specific Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Contact Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Other States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Other Information and Overrides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Schedule L (Balance Sheet per Books) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Flow of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Reconciliation Totals Displayed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Force-Printing Final End-of-Year Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The SCH2 Screen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Autobalance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Schedules M-1 and M-3 (Reconciliation of Income per Books) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Schedule M-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Schedule M-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Force-Printing Schedule M-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Schedule M-2 (Unappropriated Retained Earnings). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
M-2 Troubleshooting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Schedule O (Controlled Group Information) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
AMT Adjustments and Other Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Types of Controlled Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Line 5, Apportionment Plan Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Credits and Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Adjusting Charitable Contributions/NOL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Making an Election in Drake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Election Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Safe Harbor Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Making Changes on the Fly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Suppressing/Forcing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Calculation and Other Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Overriding Other Setup Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Electronic Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Common Reject Codes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Special Types of Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Electing a 52-53–Week Year (Initial Return). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

vi Tax Year 2016

Drake Tax Manual Supplement: Corporations

Inactive Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Binary Attachments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
The PDF Attachment Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Form 3115, Application for Change in Accounting Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Accessing Screens for Changing Accounting Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Form 3115 Screens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Importing Trial Balance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Preparing to Use Trial Balance Import. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Preparing Financial Data for Import . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Entering Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Saving a File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Importing Data into a Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Special Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
“EF Notice” Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Appendix A: Trial Balance Import .........................................................A-1

Index......................................................................................................... lxv

Tax Year 2016 vii

 Drake Tax Manual Supplement: Corporations

This page intentionally left blank.

viii Tax Year 2016

Corporations (1120)

The basics of data entry for a corporation (1120, 1120-C, 1120-H) return are the same
as for a 1040 return. Navigation through data entry, field- and screen-level help, and
keyboard shortcuts all function as they do in the 1040 program. See the 2016 Drake
Tax User’s Manual for the basics of using the program. (The manual is available on
the installation CD and on the Drake Support website: Support.DrakeSoftware.com >
Training Tools > Manuals.)

What’s New in Drake Tax for Corporations

Drake Tax programs its software according to the latest IRS rules and regulations. The
2016 program reflects all changes to forms, credits, and deductions. For details on the
new regulations for the 2016 tax year, see the IRS instructions for Form 1120.

The following changes have been made to the 1120 program in Drake Tax for the
2016 tax year.

Filing Security Information Screen

The new Filing Security Information screen (Figure 1 on page 10) is part of an
industry-wide initiative to better protect taxpayers and return preparers. Completing
this screen for federal returns is strictly optional for 2016; however, certain states will
begin requiring this information in the near future.

Tax Year 2016 9

What’s New in Drake Tax for Corporations Drake Tax Manual Supplement: Corporations

Figure 1: The new Filing Security Information screen (SEC)

The information entered on the screen is transmitted when the tax return is e-filed.

The Filing Security Information screen (SEC) is accessible through a link on screen 1
or from the Data Entry Menu.

K-1 Export to all Packages

The K-1 Export feature can now export K-1 data from partnerships to an 1120 return
in Drake Tax. See “K-1 Export” on page 31 for details.

Oil and Gas Depletion Worksheet

The new Oil and Gas Depletion Worksheet calculates oil and gas depletion and gives
your clients the best possible deduction.

The DEPL screen is completed in the Business packages in a similar fashion to the
1040 package. For details, see Chapter 5 of the 2016 Drake Tax User’s Manual.

Foreign Tab
Use screens on the new Foreign tab of the Data Entry Menu for entering data on for-
eign financial accounts, for filing FinCEN Form 114, Report of Foreign Bank and
Financial Accounts, and Form 8804, Annual Return for Partnership Withholding Tax
allocable to foreign partners.

10 Tax Year 2016

Drake Tax Manual Supplement: Corporations Practice Management Tools

Also available on the Foreign tab are the screens used in completing Form 8938,
Statement of Specified Foreign Financial Assets, Form 5472, 25% Foreign-Owned
U.S. Corporation, and Form 5471, Information Return of U.S. Persons with Respect to
Certain Foreign Corporations.

For more on completing FinCEN Form 114, see “Foreign Financial Accounts” on
page 261 of the 2016 Drake Tax User’s Manual.

Practice Management Tools

For details on additions and enhancements to Drake Tax’s practice management
tools—such as the new password requirements and other security enhancements, the
new data entry toolbar, changes to Drake Documents (formerly DDM)—see Chapter 1
of the 2016 Drake Tax User’s Manual.

Before You Start

Actions you might need to take before starting a 2016 corporation return in Drake Tax
include:

• Updating a prior-year return (if you prepared the tax return last year in Drake Tax)
• Changing a return from another type of return to an 1120, if the corporation has
made such a change in the last year

Updating a Prior-Year Return in Drake Tax

A prior-year return can be updated in three ways:

• As a single return (updated one at a time) using Last Year Data > Update Clients
2015 to 2016 (recommended)
• When you open a 2015 return for the first time in the 2016 program and are
prompted to update it
• With all other returns in the program using Last Year Data > Update Clients
2015 to 2016 (not recommended)

When you update an 1120 return that was marked “final” the previous year, the pro-
gram informs you that the return was marked final before prompting you to proceed.

Converting from Another Return Type

If the corporation is electing to become an 1120 corporation after existing as another
type of entity (S corporation, partnership, etc.), it is necessary to indicate this in the
program.

To change from another type of entity to an 1120 corporation in Drake Tax:

1. From the Home window menu bar, select Tools > File Maintenance > Change
File Type.
2. Enter the EIN of the entity and click Continue.

Tax Year 2016 11

Header Information Drake Tax Manual Supplement: Corporations

3. Select the new return type.

4. Click Continue to save the change, then click OK.

Filing Form 1120-C or 1120-H

No preliminary steps are required for completing Forms 1120-C or 1120-H. Use the
same screens you might for an 1120 return, but include one of the following screens in
addition (accessible from the first Other Forms tab of the Data Entry Menu):

• 20C — For Form 1120-C, U.S. Income Tax Return for Cooperative Associations
• H — For Form 1120-H, U.S. Income Tax Return for Homeowners Associations

If one of these screens contains data, the program automatically produces the type of
return indicated. For example, if a deduction is entered on screen 20C, an 1120-C
return will be produced.

Is Form 1120-C or 1120-H being produced in error? Check the corre-

TIP sponding screen (20C or H) for data entered. To delete a screen, open
the screen and press CTRL+D, or from the new data entry screen tool-
bar, select Delete.

Header Information
Screen 1 contains fields for the general information printed in the top section of page 1
of Form 1120 (or Form 1120-C or 1120-H, as applicable).

Name and Address

Use screen 1 to enter the corporation’s name and address for Form 1120. For state pur-
poses, if the corporation has an alternate address (such as a P.O. box), you can enter
that address on screen 2, State General Information, in the Address Line 2 field at
the bottom of the screen.

The screen 2 link is located on the States tab of the Data Entry Menu
NOTE and on screen 1. You can also type 2 into the selector field and press
ENTER.

Tax Year
The program uses the calendar year as the default tax period for all corporation
returns; no date entries are required on screen 1 for a December 31 tax year end.

12 Tax Year 2016

Drake Tax Manual Supplement: Corporations Header Information

Fiscal and If the corporation uses a fiscal year (where the year begins in the current calendar year
Calendar and ends in the next), specify the beginning and ending dates in the If not calendar
Years year section in the lower left corner of screen 1.

The program adjusts calculations for depreciation and for gains and

NOTE losses on sales of assets based on the entity’s tax year.

For information on filing with a 52-53–week year, see “Electing a 52-
53–Week Year (Initial Return)” on page 46.

Short-Year A corporation might have to file a short-year return if the corporation is changing
Returns accounting periods with IRS approval (Form 3115), or if this is its first or last year in
business and the tax year is not a full year.

Short-year return election information and 52-53-week tax year information is entered
on the Year screen, available on the Miscellaneous tab of the Data Entry Menu or
from a Year link on screen 1. (Certain other elections are made from the ELEC
screen.)

To enter short-year election information:

1. Enter short-year dates on screen 1 in the Fiscal year begins and Fiscal year ends
fields, even if the firm uses the calendar year for full-year returns. (These dates
will appear on the top of the federal form.)
2. Click the Year link to open the Year screen.
3. Make your short-year selection from the Other short-year election reason drop
list. Your explanation is displayed at the top of the first page of the tax return. If
you do not select an explanation, an EF Message is generated with the return, and
the return cannot be e-filed.

If you selected “09 General Explanation” from the Other short-year reason drop list,
type details on the reasons for filing a short-year return in the Explanation text box;
otherwise, an EF Message is generated.

For more information on short-year explanations, see IRS Pub.

4163.
NOTES The program may not correctly calculate depreciation, gains, or
losses for a short-year return. Depreciation for a short-year return
can be entered on screen 4562 and screens 6, 7, 8, and 9.

Boxes A through E
Use screen 1 to enter most information for boxes A through E (top of Form 1120).
Note that boxes A-4 (“Schedule M-3 attached”) and D (“Total assets”) are completed
automatically by the program based on data entered elsewhere.

Box 1a (“Consolidated return”) in section “A” is automatically marked

if there are entries on screen 851 (Form 851, Affiliations Schedule).
NOTE Box 2 (“Personal holding company”) in section “A” is automatically
marked if there are entries on screen PH (Schedule PH, U.S. Per-
sonal Holding Company (PHC) Tax).

Tax Year 2016 13

Income and Deductions Drake Tax Manual Supplement: Corporations

Income and Deductions

Only three screens are required in order to calculate taxable income for a return:

• INC — Includes all items of income reported on Form 1120, page 1, lines 1
through 10, that do not require a separate schedule (Schedule C) or additional
information (income reported on Form 1065, Schedule K-1); also includes tax-
exempt interest income reported on Schedule K and Schedule M-1.
• DED — Includes all deduction items reported on Form 1120, page 1, lines 13
through 26, that do not require a separate schedule or form (Form 4562). (Data for
line 12 of the 1120, “Compensation of officers,” is generally entered on screen
DED when Form 1125-E is not required; otherwise, it’s entered on screen E. See
“Compensation of Officers (Form 1125-E)” on page 17 for details.)
• J — Includes loss carrybacks, controlled group tax bracket amounts, tax payment
information, and certain credits.

Gross Receipts
Enter gross receipts (Form 1120, line 1a) and returns and allowances (Form 1120, line
1b) on lines 1a and 1b of the INC screen. Exclude any amounts that are to be reported
on lines 4 through 10 of Form 1120.

Cost of Goods Sold (Form 1125-A)

Enter the cost of goods sold (COGS) on screen A. Form 1125-A is not produced
unless entries are made on screen A.

Inventory Inventory amounts entered on lines 1 and 7 of screen A automatically flow to Sched-
ule L, line 3 (“Inventories”)

Lines 1, 2, and 7 of screen A are adjustment fields. Amounts

entered in these fields adjust (add to or subtract from) any amount
flowing from the F screen (Form 1040, Schedule F, Profit or Loss

NOTES from Farming) to line 2 of Form 1120.

On both of the Schedule L screens – L and L2 – line 3, “Invento-
ries,” is an override field. Anything entered in these fields overrides
(replaces) the total calculated from inventory data entered on
screen A.

Line 5, Other Line 5, “Other costs,” on screen A is designated for any applicable costs not entered
Costs on lines 2 through 4 (purchases, cost of labor, and additional section 263A costs). In
Drake Tax, two data-entry fields are used to complete line 5: one for other costs
excluding depreciation, and one for depreciation (Figure 2 on page 15).

14 Tax Year 2016

Drake Tax Manual Supplement: Corporations Income and Deductions

Figure 2: Screen A (Schedule A), line 5

In the “Depreciation” field, enter any depreciation that relates to the cost of goods sold
(unless the amount is flowing from the 4562 screen with COGS selected from the For
drop list). Note that this field of screen A is an override field; an entry here overrides
calculations from the 4562 screen and automatically adjusts the total depreciation that
is carried to page 1 of Form 1120. An entry in the “Other costs - excluding deprecia-
tion” field opens a Detail Worksheet (also known as a CTRL+W worksheet). The pro-
gram automatically generates a worksheet if an entry is made here, or in any other
field where a worksheet is required by the IRS. The depreciation amount is included
on the statement for other costs and should not be included in the “Other costs -
excluding depreciation” field.

Importing If using the trial balance import feature (see “Importing Trial Balance Information” on
Trial Balance page 53), enter depreciation amounts directly into the appropriate fields on the trial
to Sch A balance worksheet, not in the fields in data entry. When the trial balance is imported,
the COGS depreciation expense amount flows directly to the appropriate line of Form
1125-A and is calculated accordingly.

Dividends (Schedule C)
Enter dividends and special deductions on screen C (Schedule C). The Dividends
Received Deduction Worksheet (WK_DRD) is generated from data entered in these
fields. The result of the WK_DRD is carried to Schedule C of the return. The total
from Schedule C, line 19, column A, is carried to Form 1120, line 4 (“Dividends”),
and the total from Schedule C, line 20, column C, is carried to Form 1120, line 29b
(“Special deductions”).

NOTE If the corporation is filing a consolidated return, do not enter non-

included dividends here or anywhere else in the program.

Interest
Line 5 of Form 1120 is for interest income, which is entered on the INC screen. Note
that the Interest income field is an adjustment field; an amount entered there is com-
bined with the interest amount, if any, entered on screen 6252 (Form 6252, Installment
Sale Income) and interest income entered on screen K1P (Schedule K-1, Form 1065).

Enter tax-exempt interest income on the INC screen. This amount flows, as applica-
ble, to Schedule K, line 9, and to Schedule M-1, line 7. Override fields are available
on screens K and M1 if necessary to override the INC screen amount.

Tax Year 2016 15

Income and Deductions Drake Tax Manual Supplement: Corporations

Rents and Royalties

Enter gross rents and gross royalties using the direct-entry fields on the INC screen.
Line 7, “Gross royalties” is an adjustment field. Any amount entered here adjusts
amounts flowing from line 7 of screen K1P.

Note that passive activity loss rules may be applied to rental activities held by a
closely held corporation or a personal service corporation.

Capital Gains
Use screen 8949 to enter capital gains and losses. Short-term capital gains flow to Part
I, lines 1b, of Schedule D. Long-term capital gains flow to Part II, lines 8b-9, of
Schedule D. The net gain from Schedule D is carried to line 8 of Form 1120. (Any net
capital loss is carried to the ATT_D attachment to offset future gains.)

You can import data for Schedule D using the Form 8949 Import fea-
NOTE ture. For more on using this feature, see “Form 8949 Imports” in Chap-
ter 5 of the 2016 Drake Tax User’s Manual.

Ordinary Gains and Losses

The amount generated for line 9 flows from Form 4797, Part II, line 17. Amounts can
also flow from screen 4562 to Form 4797 (making screen 4797 entries unnecessary),
but only if screen 4562 shows assets sold, date, and property type.

Other Income (Loss)

Use the INC screen to enter amounts for the “Other income” line of the main form.
Specific INC screen entries are displayed on attached statements in View mode of the
return.

For Form 1120, calculated amounts from the following screens also flow automati-
cally to the “Other income” line (line 10):

• Screen 6478 (Form 6478, Biofuel Producer Credit)

• Screen 8864 (Form 8864, Biodiesel and Renewable Diesel Fuels Credit)

Additional fields for other income on the INC screen include:

• Amount of credit for tax on fuels

• Interest income on receivables
• Recoveries of bad debts
• Section 481 adjustments
• State tax refund
• Taxable income from insurance proceeds

16 Tax Year 2016

Drake Tax Manual Supplement: Corporations Income and Deductions

• Other (itemize) (Detail worksheet is required.)

Data from Schedules K-1 received from partnerships should be entered

NOTE on the K1P screen (located on the first Other Forms tab of the Data
Entry Menu).

Compensation of Officers (Form 1125-E)

Form 1125-E, Compensation of Officers, is not generated automatically with the
return unless it is required—in other words, unless total receipts (line 1a, plus lines 4
through 10) on Form 1120 are $500,000 or more. To force the program to print Form
1125-E, from the PRNT screen, select Force Form 1125-E, Officer Compensation.

Officer Use screen E to enter officer information and compensation amounts. Press PAGE
Information DOWN to enter additional officers. Screen E totals are calculated and carried to line 12
of Form 1120.
The total of officer compensation can be entered in the Officer compensation over-
ride field on the DED screen (generally used when Form 1125-E is not required). An
entry in that field overrides any calculations from screen E, changing lines 12 and 27
of Form 1120, but it does not change the numbers on Form 1125-E.

You may “truncate” the officer’s Social Security Number in the ID num-

TIP ber field of screen E. To do so, enter five zeros (“0”) and then the last
four digits of the SSN. You must press CTRL+F to “force” the program to
accept the truncated number.

IMPORTANT
Neither “FOREIGNUS” nor “APPLD FOR” is acceptable in
the ID number field. Returns with “FOREIGNUS” or
“APPLD FOR” in this field are not eligible for e-file.

Screen E Screen E has two check boxes: Signs return and Books in care of. Mark the applica-
Check Boxes ble box on the screen that identifies the officer who either signs the federal or state
paper returns or is the contact person for the books (state return only).

Ownership & The Ownership and Participation fields on screen E are required. Fields are as fol-
Participation lows:

• Total — Enter the officer’s ownership percentage.

• Common — Enter the percentage of common stock owned by the officer.
• Preferred — Enter the percentage of preferred stock owned by the officer.
• Time — Enter the percentage of time the officer devotes to the corporation.

Enter percentage amounts in whole numbers. For example, enter 40 for 40%

Salaries and Wages

Use the DED screen to enter salaries and wages paid. Note that the DED screen
amount is reduced by the amount, if any, of credit from Form 5884. Also note that the
“Salaries and wages” field on the DED screen is an adjustment field; an amount

Tax Year 2016 17

Income and Deductions Drake Tax Manual Supplement: Corporations

entered here adjusts any amount entered on screen F (Form 1040, Schedule F, Profit
and Loss from Farming) in the “Labor hired” field.

The “Salaries and wages” amount should not include compensation of

NOTE officers. Enter officer compensation data either on screen E or as “Offi-
cer Compensation” on line 12 of the DED screen.

Repairs and Maintenance

Enter repair and maintenance costs on the DED screen. An amount entered here is
combined with the amount, if any, entered in the Repairs and maintenance field on
screen F.

Bad Debts
Use the “Bad debts” line on the DED screen to enter the total debts that became
worthless in whole or in part during the year, but only to the extent that such debts
related to a trade or business activity

Enter deductible non-business bad debts as a short-term capital loss on

NOTE screen 8949 (Capital Gains & Losses).

Cash method corporations cannot take a bad debt as a deduction
unless the amount was previously included in income.

Rents
Use the DED screen to enter rent paid on business property used for a trade or busi-
ness activity. If the corporation rented or leased a vehicle, enter the total annual rent or
lease expense incurred in the trade or business activity of the entity, and then complete
Part V of the 4562 (screens 8 and 9).

The Rents field is an adjustment field. An amount entered here is com-

NOTE bined with the amount, if any, entered in the Rent fields on screen F,
lines 24A and 24b.

Taxes and Licenses

Enter tax and license amounts in the Taxes and licenses section of the DED screen.
Amounts are combined and the sum generated on Form 1120, line 17 (“Taxes and
licenses”). Note that credit from Form 8846 (Credit for Employer Social Security and
Medicare Taxes Paid on Certain Employee Tips) adjusts the line 17 amount.

These amounts also appear on the Taxes and Licenses Attachment

(“Attachment Tax/Lic”), referred to on line 17 with the literal, “ATT_CTL.”

NOTE To keep the notification from appearing, go to the PRNT screen (acces-
sible from the General and the Miscellaneous tabs of the Data Entry
Menu) and select Suppress printing form and attachment refer-
ences.

18 Tax Year 2016

Drake Tax Manual Supplement: Corporations Income and Deductions

State tax amounts (income tax and franchise tax) entered on the ES (Estimated Taxes)
screen are carried to the tax computation (Wks 1120W) worksheet. The state tax
amount carried from the ES screen may differ depending on which method of
accounting (cash or accrual) is used.

Interest Expense
Enter interest expense on the DED screen. Note that the Interest expense field is an
adjustment field. Any amount entered here is combined with the amount, if any,
entered in the Interest fields on screen F.

Charitable Contributions
The DED screen provides two fields for entering data for line 19, “Charitable contri-
butions” (Figure 3).

Figure 3: Charitable contribution lines on the DED screen

• Contributions — Enter the gross amount of contributions for the year that are
subject to the 10% limit on deduction.
• Qualified conservation contributions — Enter the gross amount of contribu-
tions for the year that are not subject to the 10% limit. These contributions have a
carryover period of 15 years; see IRS instructions for details.
The program calculates the contributions allowed and determines carryover capability
for amounts entered in both fields for line 19 and reflects the applicable amount on
Form 1120. (Refer to the Contribution Limitation/Carryover Worksheet (“Wks Con-
trib”) for calculation of allowed amount.) Contribution carryovers from prior years are
entered on the LOSS screen.

Note that both fields of line 19 are adjustment fields; entries here adjust amounts flow-
ing from screen K1P, line 13, codes A and B.

Depreciation
Enter depreciation on the 4562 screen. Select a form from the For drop list
(Figure 4 on page 20) to associate the depreciable item with the correct form or activ-
ity. Data from the 4562 screens is calculated and carried to Form 1120 and to the
selected schedules or forms.

Tax Year 2016 19

Income and Deductions Drake Tax Manual Supplement: Corporations

Figure 4: Selecting “1120” from the For drop list of the 4562 screen

For more on the For drop list in Drake Tax, see “Associating One
NOTE Screen with Another,” in Chapter 3 of the 2016 Drake Tax User’s Man-
ual

Depletion
Enter depletion deductions on the DED screen. See Form 1120 instructions and Pub.
535 for more information on depletion.

Oil and Gas The DEPL screen is accessible from the first Other Forms tab of the Data Entry
Depletion Menu. Create a separate depletion worksheet for each oil or gas interest. (Press PAGE
Worksheet DOWN to open a fresh instance of the DEPL screen.) Enter data for cost depletion,
percentage depletion, or for both. If data for both cost and percentage depletion is
entered, the program does both computations and sends the one that gives the corpora-
tion the best deduction to the proper form or schedule. (Not all corporations have the
option of using either method. Consult Publication 535 for additional information.)

Entries on the DEPL screen flow to the Oil and Gas Depletion Worksheet (“Wks
DEPL”) in View mode.

Advertising
Enter advertising expenses on the DED screen.

Pension and Profit-Sharing

The program reduces this expense based on the credit amount calculated from Form
8881, Credit for Small Employer Pension Plan Startup Costs.

Employee Benefit
Contributions to employee benefit programs not claimed elsewhere on the return that
are not an incidental part of any plans are entered in an adjustment field on the DED
screen. An amount entered on this field adjusts the amount being carried from Sched-
ule F, Profit or Loss from Farming.

20 Tax Year 2016

Drake Tax Manual Supplement: Corporations Tax, Refundable Credits, and Payments

Domestic Production Activities

Click the 8903 link Use screen 8903 to complete Form 8903, Domestic Production Activities Deduction
on screen DED. (DPAD). The calculated total of screen 8903 flows to line 25 of Form 1120.

NOTE The DPAD is not allowed on returns with a net operating loss (NOL) for
the current year. It also cannot be used to create a current-year loss.

Other Deductions
Enter all other deductions on the DED screen. The program calculates these amounts
and incorporates the total into line 26 (“Other deductions”) of Form 1120. The follow-
ing deductions, credits, adjustments, and exclusions also flow to line 26:

• Amortization from Form 4562

• Credit from Form 8820, Orphan Drug Credit
• Exclusion from Form 8873, Extraterritorial Income Exclusion
• Credit from Form 8941, Credit for Small Employer Health-Insurance Premiums

Drake Tax automatically calculates meals and entertainment limita-

NOTES tions.
A Detail Worksheet is opened when you type an amount in the
“Other (itemize)” field.

NOL Carrybacks and Carryforwards

Enter NOL carrybacks from future years to the current year on screen J (Loss Carry-
back, Tax Computation, Payments). To enter multiple carryback amounts, double-
click in the field to open a Detail Worksheet.

Use the LOSS screen to enter NOL carryforwards, capital losses, and contribution
carryforwards from prior years. Use screen J to enter current-year carrybacks to prior
years.

Tax, Refundable Credits, and Payments

Screen J has fields for completing the “Tax, Refundable Credits, and Payments” sec-
tion of Form 1120. Note that some fields are overrides. Press F1 to view more infor-
mation on a field.

Total Tax
For corporations that belong to a controlled group, complete all applicable fields on
screen J. If allocating income to the various brackets on this screen, you must enter 0
(zero) in the fields of the brackets to which no income is allocated.

The total tax from Schedule J is calculated and carried to line 31 of Form 1120.

Tax Year 2016 21

Form 3800 Drake Tax Manual Supplement: Corporations

Controlled groups are also required to complete Schedule O. Use the O

NOTE screen in Drake to complete Schedule O. See “Schedule O (Controlled
Group Information)” on page 40.

Form 3800
Use screen 3800 to claim current-year business credits that are not supported by Drake
Tax.
Screen code: 3800 In Part III - General Business Credits, enter the amounts of nonpassive and passive
activities of the unsupported credits.

Returns with these current-year credit forms that are not supported by
Drake Tax must be paper-filed.
Pass-through credits from those unsupported forms are supported by
NOTES Drake Tax. Enter these pass-through credits on screen K1P. Enter car-
ryforwards on screen GBC.
To enter data for credits that are supported by Drake Tax, use the
credit’s screen. For example, use the 8820 screen for Form 8820,
Orphan Drug Credit.

Enter any unused current-year credit being carried back and used in 2015 in the
Amount of Carryback text box on screen 3800.

Carrybacks Use screen GBC for reporting general business credit (GBC) and eligible small busi-
and Carry- ness credit (ESBC) carrybacks and carryforwards, and to enter passive activity credit
forwards carryforwards for Form 8582-CR.
Screen code: GBC Passive activities credit carryforwards are updated to screen GBC.

To use the GBC screen:

1. Mark an appropriate check box at the top of screen GBC.

2. If appropriate, enter an EIN in the Activity EIN field; if that EIN matches one
entered on a K1 screen, the program will match the passive activity carryforward
to the current-year credit for Form 8582-CR.
3. Enter the Activity Name.
4. From the Description of credit drop list, select the description of the credit for the
amounts being carried forward from prior years or being carried back from a
future year. If necessary, enter the Amount Changed Information if the amount
changed from the original amount of the credit.
5. In the Year Originated drop list, select the year the credit was originally gener-
ated and the amount of the credit for the year generated.

Press PAGE DOWN to enter the carryforward or carryback amounts of another credit.

22 Tax Year 2016

Drake Tax Manual Supplement: Corporations Form 3800

In the Amount of Original Credit Previously Used section of screen

GBC, type in the amounts of credit carryforward used in a previous
TIP year for a true historical record. The program will compute the remain-
ing amount of the credit each year you use Drake Tax; otherwise, only
what’s left.

Estimated Taxes and Applied Refunds

Screen code: ES Enter on screen ES (available on the Miscellaneous tab) the estimated corporation
taxes paid. If necessary, use screen W to override 2016 estimated taxes paid and apply
any overpayments from 2016 to 2017.

NOTE Estimate vouchers are not used in federal corporation tax returns.

Over- Overpayments will not be automatically applied unless 2017 estimates are being cal-
payment culated. If no estimates are required, enter the application of the overpayment using
the Overpayment applied override fields.

Quick To file Form 4466, Corporation Application for Quick Refund of Overpayment of
Refund Estimated Tax, go to the PRNT screen (accessible from the General and the Miscel-
laneous tabs of the Data Entry Menu) and mark the Calculate Form 4466 box. This
is the only entry necessary to produce the form. (There is also a link to the PRNT
screen from the first Other Forms tab of the Data Entry Menu. Click 4466 Applica-
tion for Quick Refund.)

Under- Use screen 2220 to enter information for Form 2220, Underpayment of Estimated Tax
payment by Corporations. Note that the 2220 screen in Drake Tax consists of two screens. Press
PAGE UP and PAGE DOWN to move back and forth between the screens.

NOTE The program retains the underpayment and penalty rates as of 12/31 of
the calendar year.

Estimated State Taxes

Enter 2016 estimates and 2017 overpayments for state returns on the ES screen.

The ES screen also provides a way to e-file state estimated tax vouchers and pay-
ments, which is required in some states. For estimated taxes from multiple states or
cities, press PAGE DOWN and go to a new ES screen.

For details on using the ES screen for filing federal estimated taxes, and on e-filing
and paying state estimated taxes, see “Estimated Taxes,” in Chapter 5 of the 2016
Drake Tax User’s Manual.

Tax Year 2016 23

Direct Deposit of Refunds Drake Tax Manual Supplement: Corporations

If you are not filing four quarterly state vouchers—for instance, if filing
too late to pay first quarter payment—the program adds the amount of

NOTES the missed payment to the next available voucher. Enter “0” in the Esti-
mate amount voucher field for the quarter the payment was not made.
The Increase/Decrease calculated estimates by... text box on the ES
screen allows you to adjust the total estimated taxes due.

Direct Deposit of Refunds

The IRS requires that Form 8050, Direct Deposit of Corporate Tax Refund, be submit-
ted with an e-filed return in order for a corporation’s refund to be direct-deposited. To
access this form in Drake, go to the DD screen, accessible from the General tab.

When filling out the DD screen:

• If the federal refund is to go to the account listed, select Yes for the Federal selec-
tion drop list; otherwise, select No. (Default is Yes.)
• If a state refund is to go to the account listed, select the state abbreviation from the
State/City selection drop list.
• Enter the name of the financial institution, the routing number (RTN), the account
number, and the type of account (Checking or Savings).
• Re-enter the routing number, account number, and type of account to verify
(Figure 5).

Figure 5: Federal section of DD screen (also 8050 screen)

If receiving refunds from different state tax authorities, use the State Account boxes
on the DD screen to indicate where other state refunds should be deposited.

Electronic Funds Withdrawal (Direct Debit)

Use the PMT screen, accessible from the General tab, to indicate that the balance due
for an e-filed return should be withdrawn (direct-debited) from an account.

Program Defaults and Overrides

By default, the program indicates that the entire balance due (line 34, “Amount
owed”) is to be withdrawn on the return due date. To indicate otherwise, complete the
Requested payment date override fields (see Figure 6 on page 25) for the applicable

24 Tax Year 2016

Drake Tax Manual Supplement: Corporations Filing an Extension

payment. If the return is e-filed on or before the due date, the requested payment date
cannot be later than the due date. If the return is transmitted after the due date, the
requested payment date cannot be later than the date the return is transmitted.

Required Information
A Withdrawal selection (item #1 in Figure 6) is required if the program is to direct
tax authorities to withdraw funds from the corporation’s bank account.

Figure 6: Required fields on PMT screen: withdrawal selection (1);

account information (2); specified return (3)

The name of the financial institution, RTN, account number, and account type are
required. As with the DD screen, the RTN, Account number, and Type of account
data must be entered twice (item #2 in Figure 6).

Finally, the PMT screen must indicate the return to which the payment data applies
(item #3 in Figure 6). Mark the box of the applicable return type: 1120, 7004, or
1120X.

Withdrawal from Multiple Accounts

Only one account can be designated for direct debit of funds for payment of federal or
state taxes. To have state amounts withdrawn from an account other than the account
indicated for federal payments, complete the fields in the State Account sections of
the PMT screen.

NOTE Neither the federal nor the state balance due can be paid from more
than one account.

Filing an Extension
Calendar year returns are due on April 18, 2017. By filing Form 7004, a corporation
can extend the deadline six months to October 16. Fiscal year returns are due on the
15th day of the fourth month after the end of the corporation’s business year for corpo-
rations with other than a June 30 ending date; corporations with an ending date of June
30 must file their returns by the 15th day of the third month after the end of their busi-
ness year.

Tax Year 2016 25

Signing the Return Drake Tax Manual Supplement: Corporations

The 7004 extends the deadline six months (seven months for corporations with June
30 ending dates).

Use one of the following options to file an extension for an 1120, 1120-C, or 1120-H:

• Go to the 7004 screen in Drake Tax and select Generate an extension. Complete
any other applicable fields on the screen.
• Go to the PRNT screen and select Prepare Form 7004 extension based on
screen 1 info.

Signing the Return

Electronic PIN signatures are required for e-filed returns. If e-filing a return, complete
all fields on the PIN screen. A return cannot be e-filed if the PIN screen fields, includ-
ing the title and signature (name) of the officer signing the return, are not completed.

An 1120 return must be signed and dated by one of the following individuals:

• The corporation’s president, vice president, treasurer, assistant treasurer, or chief

accounting officer
• Any other corporate officer, such as a tax officer, who is authorized to sign

If the return is prepared by a paid preparer, the preparer must complete the required
information and “sign” the return (enter his or her PIN) in the space provided on the
PIN screen. If it is prepared by an employee or officer of the corporation, go to screen
1 and select NONE in the Firm # and Preparer # drop lists.

To have the preparer’s name and address information displayed on the printed return:

• If the return preparer and ERO (entered in Setup > ERO & Account Informa-
tion) are the same:
– Go to Setup > Preparer(s) and ensure that the Alternative Electronic Signa-
ture box is marked for the preparer.
– Complete the PIN screen for the return.
• If the return preparer and ERO are not the same:
– Go to the PRNT screen for the return and complete the field labeled PIN for
preparer’s alternative electronic signature. The PIN entered should match
the one entered for the preparer in Setup > Preparer(s). (For more informa-
tion, press F1 in this field.)

Setup > ERO & Account Information must still be completed in

NOTE Drake Tax to e-file. For information on how to complete this setup
window, see 2016 Drake Tax User’s Manual. See the IRS instructions
for further details on signature requirements.

If you mark the “Signs return” check box on screen E, that officer’s

TIP information flows to the signature line of the return so you won’t have to
reenter it on the PIN screen. You will still have to enter an officer’s PIN
and signature date on the PIN screen for e-file.

26 Tax Year 2016

Drake Tax Manual Supplement: Corporations Amending a Return

Amending a Return
The program can automatically fill the 1120X screen for Form 1120X, Amended U.S.
Corporation Income Tax Return.

When you amend a return in Drake Tax, the amended informa-

tion replaces the original in the data file. Before amending a

CAUTION return, you should archive the original to avoid losing previ-
ously submitted data. For more information on archiving
returns, see “Archive Manager” in Chapter 6, “Return Results,”
of the 2016 Drake Tax User’s Manual.

Returns From the Data Entry Menu of an 1120 return, enter an X in the selector field and
Previously press ENTER. (Screen X is also accessible from the first Other Forms tab.) At the
Prepared in prompt, select Yes to automatically fill the screen with data from the original return
Drake Tax (that is, the return as originally entered in Drake Tax). If the corporation’s name or
address information has changed, enter the new information on screen X. Make all
other necessary changes to the regular data entry screens.

Open screen X2 (or press PAGE DOWN while in screen X). Enter the line number from
the X screen that corresponds with the changes that were made in data entry. (For
instance, if you made a change in the tax on screen J, enter 4 (for “Tax”) in the Line
Number field of the X2 screen.) Enter an explanation in the Explanation of changes
text box.
If more than one item was changed in data entry, press PAGE DOWN to open another
screen X2. Enter the line number from screen X that corresponds to this change and
enter another explanation.
When you go to View mode, the program calculates the amended return.

New Returns To amend a return not previously prepared in Drake Tax, create an 1120 return in
Drake Tax and open screen X. Complete the applicable fields on this screen, and then
enter the amended data in the appropriate other screens, as described in the following
example.

Example: An 1120 return was filed using a different tax software, but gross rental
income was not reported on line 6 of the return. To amend the return:

1. Create an 1120 return in Drake Tax.

2. From the Data Entry Menu of the return, open screen X.
3. Complete all applicable fields on screen X.
4. Close screen X and open the INC screen.
5. Enter the amount of unreported income on line 6.
6. Close the INC screen and open screen X2.
7. Enter the line number from the X screen that corresponds to the changes that were
made in data entry. (For this instance, if you made a change to income on the INC
screen, enter 1 (for Total Income) in the Line Number field of the X2 screen.
8. Enter an explanation in the Explanation of changes text box.

Tax Year 2016 27

Schedule K Drake Tax Manual Supplement: Corporations

9. Calculate and view the return. Note the adjustments made on the Form 1120X.

e-Filing an To add Form 1120X to the queue for e-file, go to the EF screen for the return (accessi-
Amended ble from the General tab of the Data Entry Menu) and mark the 1120-X box. For
Return detailed instructions on e-filing the returns in the queue, see Chapter 8, “e-File,” in the
2016 Drake Tax User’s Manual.

Schedule K
Use screen K to enter data for Schedule K, Other Information. Screen K should also
be used for Schedule K of Form 1120-C. Detailed here are some specific areas that
might need your attention.

Schedule K, Line 3
On line 3 (line 5 of the 1120C column) of screen K, type the EIN and name of the par-
ent corporation if the corporation is a subsidiary in an affiliated group or a parent-sub-
sidiary controlled group.

Be aware of the following guidelines from the IRS:

• If the corporation is an “excluded member” of a controlled group (see definition in

the Instructions for Schedule O (Form 1120)), it is still considered a member of a
controlled group for this purpose.
• An affiliated group is one or more chains of includable corporations (section
1504(a)) connected through stock ownership with a common parent corporation.
The common parent must be an includable corporation and the following require-
ments must be met:
– The common parent must directly own stock that represents at least 80% of
the total voting power and at least 80% of the total value of the stock of at
least one of the other includable corporations.
– Stock that represents at least 80% of the total voting power and at least 80%
of the total value of the stock of each of the other corporations (except for the
common parent) must be owned directly by one or more of the other includ-
able corporations.
– For this purpose, the term “stock” generally does not include any stock that
(a) is nonvoting, (b) is nonconvertible, (c) is limited and preferred as to divi-
dends and does not participate significantly in corporate growth, and (d) has
redemption and liquidation rights that do not exceed the issue price of the
stock (except for a reasonable redemption or liquidation premium). See sec-
tion 1504(a)(4).

Schedule K, Line 4
If a corporation owned, directly or indirectly, 20 percent or more, or owned, directly
or indirectly, 50 percent or more of the total voting power of all classes of the corpora-
tion’s stock entitled to vote, the applicable data appears on Schedule G. In Drake Tax,
Schedule G data is entered on screens G1 and G2, accessible through the G1 Screen

28 Tax Year 2016

Drake Tax Manual Supplement: Corporations Schedule K

and G2 Screen links on line 4 of screen K, or from the General tab of the Data Entry
Menu.

If the stock is owned by any foreign or domestic corporation, partnership, or trust,

enter on screen G1 the name and EIN of the entity, the type of entity (foreign or
domestic corporation, partnership, trust, etc.), the country of the corporation organiza-
tion, and the percentage of stock the entity owns.

If the stock is owned by an individual or estate, enter on screen G2 the name and ID
number of the individual or estate, country of citizenship, and percentage of stock
owned.

Use the CTRL+PAGE DOWN function to open additional (blank) G1 or G2 screens. For
more information on line 4 of Schedule K, see the IRS instructions.

Schedule K, Line 5
If the corporation owned stock in other corporations or partnerships or the beneficial
interest in a trust, enter the information on the K5A or K5B screen. Click the K5A
Screen or K5B Screen links on the K screen or from the General tab of the Data
Entry Menu to access fields for entering this information.
Use the CTRL+PAGE DOWN function to open additional (blank) K5A or K5B screens.
For more information on line 5 of Schedule K, see the IRS instructions.

Schedule K, Line 7
Complete the fields on line 7 of screen K if a foreign person owned, directly or indi-
rectly, at least 25% of the total voting power of all classes of the corporation’s stock
entitled to vote, or the total value of all classes of stock of the corporation. (If there is
more than one 25%-or-more foreign owner, complete the fields for the person with the
highest percentage of ownership.) Enter the percentage that person owned and the
owner’s country of residence.

Generally, a 25% foreign-owned corporation with a reportable trans-

action during the tax year must file Form 5472, Information Return of
NOTE a 25% Foreign Owned U.S. Corporation or a Foreign Corporation
Engaged in a U.S. Trade or Business (screen 5472 in Drake Tax).
See Form 5472 for filing instructions and penalties for failure to file.

See section 6038A(c)(5) and the related regulations for the constructive ownership
rules of section 318 that apply in determining if a corporation is foreign owned.

If another entity owns 20% or more of the client’s corporation, or

NOTE owns 50% or more of the corporation’s stock entitled to vote, see
“Schedule K, Line 4” on page 28.

Tax Year 2016 29

Schedule K-1 Drake Tax Manual Supplement: Corporations

Schedule K, Line 13
On line 13 of screen K, select Yes if the corporation’s total receipts (line 1a + lines 4
through 10 on page 1 of Form 1120) are less than $250,000 for the tax year, and its
total assets at the end of the tax year are less than $250,000.

If the answer to line 13 is Yes, in the lower text box of line 13 enter the total amount of
cash distributions and the book value of property distributions (other than cash) made
during the tax year. (An entry here is added to the amount calculated from entries on
line 5, “Distributions,” on the M2 screen and reflected on page 4, line 13, of the 1120
return.)

If the answer on line 13 is Yes, the corporation is not required to com-

NOTE plete Schedules L, M-1, or M-2. To force the program to print these
forms, go to the PRNT screen and select Force Schedules G (1120-
C), L, M-1, and M-2 to be printed.

Schedule K-1
The 1120 package includes a K1P screen (accessible from the first Other Forms tab
of the Data Entry Menu) for entering information from Form 1065, Schedule K-1.
This screen works the same as it does for the other packages, with amounts being car-
ried automatically to the appropriate forms, schedules, and lines.

TIP See “K-1 Export” on page 31 details on exporting K-1 data directly from
a partnership return into the corporation’s K1P screen of Drake Tax.

In addition:

• Ordinary income is carried to Form 1120, page 1, line 10, “Other income,” with
the partnership name and EIN (required information)
• Ordinary losses are carried to Form 1120, page 1, line 26, “Other deductions,”
with the partnership name and EIN (required information)

Depending on your setup, the partnership name and EIN will appear in a statement
referenced on line 10 or line 26.

Codes or lines that don’t flow to any other place may require additional information
not available to the program and must be manually entered in the proper place in the
return.

Missing ID If the corporation received a Schedule K-1 from a partnership and the partnership did
Number not have an ID number—for instance, if the partnership was foreign and did not have
an EIN—type “F” into the Partnership EIN field of the K1P screen and the word
FOREIGNUS is automatically entered. If the partnership had applied for an SSN or
EIN but had not yet received an ID number, type “A” to have APPLD FOR entered
in the Partnership EIN field.

30 Tax Year 2016

Drake Tax Manual Supplement: Corporations Schedule K-1

K-1 Export
New for 2016: Take the following steps to export K-1 information from a partnership
return into the K1P screen of an 1120S return:

1. Ensure that K-1 data is entered in the partnership return and that the 1120 return
has been created. (The K1P screen in the 1120 does not have to be created before-
hand.)
2. In the partnership return, go to View mode.
3. Click K1 Export in the View toolbar. If any K-1s are not eligible to be exported,
that list appears. Click Next to continue; otherwise, the Export K1s window is
opened, containing a list of K-1s eligible for export.
4. All SSNs and EINs in the list are eligible for export. Remove the check mark from
the box to the left of any EINs or SSNs you do not wish to export. (See Figure 7.)
5. Click Export. The K-1 data will be displayed in the 1120 return in the program.

Figure 7: Exporting K-1 data from a partnership return into

the corporation return for Seay’s Trucking

Tax Year 2016 31

State-Specific Information Drake Tax Manual Supplement: Corporations

State-Specific Information
The program automatically generates a return for the corporation’s resident state. Use
screen 2 to enter company information as it should appear on the state return.

The link to screen 2 is on the States tab, (or enter 2 in the selector field

NOTES and press ENTER.)

The company information fields on screen 2 apply for the resident state
only.

Company information includes the type of return that applies for state purposes (con-
solidated, composite, controlled group), and state-specific dates and numbers for iden-
tification.

Contact Information
If certain contact information required for state purposes is different from that entered
on screen 1, use screen 2. This screen has fields for the following types of contact
information:

• Name and address of registered agent

• Principal place of business
• “Books in care of”
• General contact information for the name, title, email address, ID number, and
telephone number of the corporation’s contact person.

Other States
Data for states other than the resident state must be entered manually in state data
entry. To access state data entry, select the States tab from the Data Entry Menu, or
enter the two-letter state code in the selector field and press ENTER.

Multi-State Enter sales, payroll, and property factors on the APPT Multi-State Apportionment
Appor- screen. This screen (Figure 8 on page 33) provides one central location for entering all
tionment state apportionment information instead of having to open each needed state’s screen.

In addition to making data input faster and easier, this feature provides two work-
sheets: a summary worksheet, “Wks SA-SUM,” that can be used for verifying input,
and a reconciliation worksheet, “Wks SA-REC,” that ties the total of the state amounts
to the federal return figures. These worksheets are available in View mode.

The individual state apportionment screens can be used to override data entered on the
APPT screen.

32 Tax Year 2016

Drake Tax Manual Supplement: Corporations State-Specific Information

Figure 8: State APPT screen

Mark the Zero Apportionment check box (Figure 8) to add a state but

NOTE not include any apportionment data. This will include the state on the
apportionment summary worksheet “Wks SAC-SUM,” available through
View mode.

APPT Screens The APPT screen is opened to the Sales tab. Links at the top of this screen open the
Payroll, Property, and Additional Property information tabs for each state selected.
These screens and their uses are listed in Table 1:

Table 1: APPT Screens

Screen Information
Sales Select state; enter sales, returns and allowance, and other
income-related information for each selected state

Payroll Enter salary, wage, commission, and labor amounts for

each selected state

Property Enter beginning and ending amounts of common apportion-

ment factors, plus select additional apportionment factors
from drop lists

Additional Property Select additional apportionment factors from drop lists

The Ending amount entered on the Property and Addition Property

NOTE screens in Drake16 will become the Beginning amount for property
on the APPT screen when the client’s return is updated next year in
Drake17.
You may enter up to four states on one APPT screen. If you need more than four
states, press PAGE DOWN for a new APPT screen. The same state can be entered more
than once when additional fields are needed.

Select OT Other Reconciliation from the State Selection drop list when using the
reconciliation worksheet. Not every item appearing on the federal return may be sub-
ject to multi-state apportionment. When you select OT, the data entered becomes a
reconciling adjustment amount to aid in tying to the federal return.

Tax Year 2016 33

Other Information and Overrides Drake Tax Manual Supplement: Corporations

Enter as much or as little detail as the states require. If a state does not require any
information to be entered, no information will flow to that state’s return.

Updating Not all data entered on screen ATTP is updated each year. When you update (from the
APPT Home window, Last Year Data > Update Clients), the states selected on the previ-
Screens ous year’s program are carried to the current year, and the “Ending” amounts on the
two Property tabs of the ATTP screen from the previous year’s program become the
“Beginning” amounts in the current year’s program.

Other Information and Overrides

Use screen 1 to enter the following additional information:

Resident State — If the corporation has a mailing address in one state but does busi-
ness in another, select the state in which the corporation does business from the Resi-
dent State drop list.

Miscellaneous Codes and Overrides — Screen 1 includes fields for miscellaneous

codes, invoice numbers, and several overrides. See “Listing a Different Firm, Pre-
parer, or ERO on a Return” in Chapter 2 and “Miscellaneous Codes” in Chapter 5 of
2016 Drake Tax User’s Manual for more information.

Schedule L (Balance Sheet per Books)

Schedule L is required if the corporation’s total receipts for the tax year or its total
assets at the end of the year are greater than $250,000.

Flow of Information
Many of the entries made elsewhere (such as inventory information from Schedule A)
flow automatically to the generated Schedule L. Depreciable asset information from
the 4562 screen and intangible assets and amortization also flow to Schedule L.

Use the corporation’s balance sheet to enter data directly onto Schedule L.

NOTE See “Importing Trial Balance Information” on page 53 for information

on using the trial balance import to enter Schedule L data.

Reconciliation Totals Displayed

Schedule L and Schedule M-2 reconciliation totals are displayed on screens L, L2,
and M2 to facilitate reconciliation of the balance sheet (item #1 in Figure 9 on
page 35).

34 Tax Year 2016

Drake Tax Manual Supplement: Corporations Schedule L (Balance Sheet per Books)

Figure 9: Beginning- and End-of-Year totals displayed on screens L and L2 (#1);

force printing end-of-year totals (#2)

Note that the totals from the balance sheet’s subsidiary schedule (SCH2 screen) also
appear in the BOY Totals and EOY Totals columns of the L and L2 screens.
If you make any changes to the data, recalculate the return (press CTRL+C) for those
changes to be displayed on the screen.

The end-of-year totals also appear on screen M2 (Retained Earnings).

NOTE From either screen L, L2, or M2, press PAGE UP and PAGE DOWN to
toggle among screens L, L2, and M2 to make reconciliation easier.

Force-Printing Final End-of-Year Totals

Normally, if you mark Final on screen 1, indicating that this is a final-year return,
Drake “zeros out” the EOY Totals column of Schedule L. Mark the Force-print final
end of year check box on screen L (see item #2 in Figure 9) to display those totals in
the EOY Totals column.

The SCH2 Screen

The SCH2 screen (see Figure 10 on page 36) is used to provide detailed information
required by the IRS for certain lines on Schedule L. The amounts are carried to Form
1120 and printed on an attached statement.

Tax Year 2016 35

Schedule L (Balance Sheet per Books) Drake Tax Manual Supplement: Corporations

This screen can also be used in place of the actual L screen in Drake Tax. If you use
this screen for all applicable lines on Schedule L, you do not need to make any entries
on screen L.

NOTE To access the SCH2 screen from screen L, click an SCH2 Screen
link. Press ESC to return to screen L.

Entering To create a statement for a line using the SCH2 screen, select the desired line from the
Information Line Number drop list and enter descriptions and their corresponding amounts.

Figure 10: SCH2 screen fields for line number, description, and amounts

Once the information is entered, or if additional descriptions are required for the line,
press PAGE DOWN to access a new screen.

All line selections and screen descriptions are carried to the next
NOTE year, and year-end amounts are carried to the beginning-of-year col-
umn, when the returns are updated.

Statements The total amounts entered on the SCH2 screen do not show up on the actual L screen
in the program. They are, however, printed on the return where needed, with refer-
ences to the corresponding statements.
If a line is required, a statement (labeled “STATEMENT” or “STM” in View mode,
depending on your Setup Options) is produced and is e-filed with the return.

SCH2 and Typically, one or more SCH2 screens are needed for Schedule L items. Data for the
Trial Balance SCH2 screens cannot be entered directly into the trial balance worksheet, although the
Import amounts must be included in the trial balance worksheet for the worksheet to balance.
When the return is produced, Schedule L will reflect the amounts imported from the
trial balance worksheets but does not include the totals of the SCH2 screens; this data
must be entered on the SCH2 screens.

See “SCH2 Detail” on page 60 for detailed instructions using the trial balance work-
sheet for SCH2 items and amounts.

Autobalance
Autobalance forces Schedule L to balance for both the beginning- and end-of-year
amounts. The program adjusts the unappropriated retained earnings amount on Sched-

36 Tax Year 2016

Drake Tax Manual Supplement: Corporations Schedules M-1 and M-3 (Reconciliation of Income per

ule L by the difference between the total assets and the total liabilities and capital
before the adjustment. For example, if assets are $1,000 and liabilities and capital are
$900, the program increases the unappropriated retained earnings by $100.)

The program makes the adjustments due to differences in the balance sheet. Incorrect
data entry could cause these differences but they are usually the result of one of the
following issues:

• An asset deleted from 4562 screen (Depreciation - Detail Items) instead of being
indicated as sold
• Beginning inventory amounts adjusted on Schedule A or ending inventory
amounts were entered incorrectly
• Amounts erroneously deleted from or changed on screen L

To reconcile the differences, it is best to compare the corporation’s beginning and end-
ing balance sheet amounts for the tax year.
To turn off this feature for a specific return, go to the PRNT screen and select Turn
off autobalance.

NOTE If you are using trial balance import, autobalance must be turned off
prior to import. See “Preparing to Use Trial Balance Import” on page 53.

Schedules M-1 and M-3 (Reconciliation of Income per Books)

Page 1 of Schedule M-3 is required if the balance sheet’s total assets at the end of the
year equal or exceed $10 million, and pages 1-3 of Schedule M-3 are required if the
total assets equal or exceed $50 million. If the corporation’s assets do not equal or
exceed $10 million but you want to voluntarily file Schedule M-3, or if the corpora-
tion’s assets do not equal or exceed $50 million and you wish to file the complete
M-3, go to screen M3 and make a selection from the Voluntarily file M-3 drop list.
Choose to print just page 1 of Schedule M-3 or the complete M-3.

If the corporation is filing Schedule M-3, Schedule M-1 will not be gen-
NOTE erated. Any entries on the M1 screen (for Schedule M-1) should be
deleted.

Schedule M-1
Schedule M-1 shows all items of income and expense that are not subject to tax, plus
those accounting items that are not income tax items. When required, the corporation
must reconcile book income with the taxable income.

Tax Year 2016 37

Schedules M-1 and M-3 (Reconciliation of Income per Books) Drake Tax Manual Supplement: Corporations

Use the M1 screen to enter book-to-tax difference for Schedule M-1. Book-to-tax dif-
ferences are classified as “permanent” or “temporary,” and as “favorable” or “unfa-
vorable.” Examples of both kind of differences are shown in Table 2.

Table 2: Examples Book-to-Tax Differences for Schedule M-1

Difference Description Examples

Permanent Book or tax items that will never be - Meals & entertainment limitations
reported for book or tax purposes - Penalties
- Tax-exempt interest

Temporary Items that will be reported for both - Depreciation

tax and book purposes, but not - Gains or losses on the sale of
during the same tax year depreciated assets

Favorable Items that reduce taxable income - Instances in which tax depreciation
amount is greater than book depre-
ciation amount

Unfavorable Items that increase taxable income - Disallowed meals & entertainment

Schedule M-3
Schedule M-3 is completed using the following screens, all found on the General tab
of the Data Entry Menu:

• M3, M31, M32, and M33 — for Parts I, II, and III of the Schedule M-3
• M3B — for Schedule B Additional Information for M-3 filers
• SCH3 — for subsidiary schedules for Schedule M-3 and Form 8916-A
• M3S — for supplemental statements
• 8916 — for reconciling of M-3 with taxable income for mixed groups
• 916A — for supplemental attachments to the M-3

If the corporation is required to file (or voluntarily files) Schedule M-3, the corpora-
tion must file Form 1120 and all attachments and schedules, including Schedule M-3.

Certain income and deduction amounts and adjustments flow from

NOTE Form 1120 to Schedule M-3 and Form 8916A in the program, but all
other M-3 data must be entered manually.
If Schedule M-3 is present in a return, no Schedule M-1 is generated.

Parts I-III Part I of Schedule M-3 asks certain questions about the corporation’s financial state-
ments and reconciles financial statement worldwide net income (loss) for the corpora-
tion (or consolidated financial statement group, if applicable) as reported on Schedule
M-3, Part 1, line 4, to net income (loss) per the income statement of the corporation
for U.S. taxable income purposes, as reported on Schedule M-3, Part 1, line 11.

Parts II and III reconcile financial statement net income (loss) for the U.S. corporation
(or consolidated tax group, if applicable) as reported on Schedule M-3, Part II, line 30
(column d), to taxable income (loss) as reported on Form 1120, page 1, line 28.

38 Tax Year 2016

Drake Tax Manual Supplement: Corporations Schedule M-2 (Unappropriated Retained Earnings)

The software carries certain items that are readily available, but it does not balance the
M-3 automatically. To ensure that the M-3 balances, additional data entry may be
required on the M31, M32, and M33 screens.

Schedule B Schedule B is required when an M-3 is present in a return. Use screen M3B for Form
1120 Schedule B, Additional Information for M-3 Filers.

The SCH3 The SCH3 screen is similar to the SCH2 screen and is used to provide detailed infor-
Screen mation for Schedule M-3 and Form 8916-A. It can be used in place of the actual M3
and 8916A screens. For more information on using this type of screen, see “The SCH2
Screen” on page 35.

Force-Printing Schedule M-3

Page 1 of Schedule M-3 is required if the balance sheet’s total assets at the end of the
year equal or exceed $10 million, and pages 1-3 of Schedule M-3 are required if the
total assets equal or exceed $50 million. If the corporation’s assets do not equal or
exceed $10 million but you want to voluntarily file Schedule M-3, or if the corpora-
tion’s assets do not equal or exceed $50 million and you wish to file the complete 
M-3, go to screen M3 and make a selection from the Voluntarily file M-3 drop list.
Choose to print just page 1 of Schedule M-3 or the complete M-3.

See “Schedules M-1 and M-3 (Reconciliation of Income per Books)” on page 37 for
more details on these schedules.

Schedule M-2 (Unappropriated Retained Earnings)

Information from Schedule M-2, “Analysis of Unappropriated Retained Earnings” ties
to the Schedule L, line 25, portion of the balance sheet. Increases, distributions, and
other decreases to the retained earnings are entered on Schedule M-2. Unappropriated
retained earnings refer to corporation income that has not been distributed to share-
holders that is available for dividend distribution.

M-2 Troubleshooting
The beginning Unappropriated Retained Earnings flow from Schedule L (Balance
Sheet), and the “Net Income (Loss) per books” flows from the completed Schedule 
M-1 or M-3 on Form 1120. These numbers, combined with amounts entered on the
M2 screen, are used to calculate the ending Unappropriated Retained Earnings.

If the computed amount does not match the amount in the completed Schedule L (Bal-
ance Sheet), the system produces an EF message that says the M-2 is out of balance.
Solving this problem can be challenging, since it can have any of several causes:

• The beginning balance sheet entries are inaccurate

• The Beginning of Year unappropriated retained earnings amount (line 25 on
screen L) entered on the SCH2 screen for line 24 (“Retained earning-Appropri-
ated”) is incorrect
• Autobalance is not turned on (See “Autobalance” on page 36.)

Tax Year 2016 39

Schedule O (Controlled Group Information) Drake Tax Manual Supplement: Corporations

• The ending balance sheet entries are inaccurate

• The net income per the tax return is inaccurate
• The reconciling items on Schedule M-1 or M-3 need to be adjusted
• The reconciling items on Schedule M-2 need to be adjusted

If the items are off by a couple of dollars or less, resolve the problem by entering a
reconciling item on the M2 screen:

1. Double-click in a field on the M2 screen to open a detail (CTRL+W) worksheet.

2. Enter the word “Rounding” as the description and enter an amount.
3. Press ESC. The program returns to the M2 screen.
If the problem is not resolved, it may be necessary to do a detailed comparison
between the corporation’s financial records and the completed return information.

Schedule O (Controlled Group Information)

Use screens O and OM, accessible from the first Other Forms tab, to fill out Sched-
ule O, Consent Plan and Apportionment Schedule for a Controlled Group. Press PAGE
UP and PAGE DOWN to navigate from screen to screen.

Members of a controlled group are entitled to one $50,000, one

NOTE $25,000, and one $9,925,000 taxable income bracket amount, in that
order.

AMT Adjustments and Other Items

Alternative Minimum Tax (AMT) adjustments are limited among the members of a
controlled group. These should be entered in the Other information fields of the OM
screen (Figure 11).

Figure 11: Other information fields for other AMT adjustments

Types of Controlled Groups

At the top of screen O, mark the box indicating the type of controlled group for which
Schedule O is reporting. Controlled group types are briefly defined below. See Sched-
ule O instructions for more details.

• Parent-subsidiary group — One or more chains of corporations that are con-

nected through stock ownership with a common parent corporation if certain con-
ditions apply.

40 Tax Year 2016

Drake Tax Manual Supplement: Corporations Credits and Adjustments

• Brother-sister group — Two or more corporations if the same five or fewer per-
sons who are individuals, estates, or trusts directly or indirectly own stock of each
corporation with a certain amount of voting power.
• Combined group — Three or more corporations, each of which is part of a par-
ent-subsidiary group or a brother-sister group, and one of which is (1) a common
parent corporation included in a group in a parent subsidiary group, or (2)
included in a group of corporations in a brother-sister group.
• Life insurance companies only — Two or more insurance companies subject to
tax under section 801, that are members of one of the previously described groups,
are treated as a particular type of controlled group.

Line 5, Apportionment Plan Status

The corporation is required to provide information about the status of the group’s
apportionment plan. Select the applicable box on line 5 of screen O to show the status
of the controlled group’s apportionment plan. If adopting a plan or amending the cur-
rent plan for a prior tax year, at least one year must remain on the statute of limitations
for each group member for assessing any resulting deficiency.

Credits and Adjustments

Certain credits require an adjustment to either income or expenses. Drake16 carries
the required adjustments to the appropriate line of the return and to Schedule M-1 or
M-3. Manually reducing the expenses/deductions or increasing the income for these
credits causes the return to be out of balance.

Adjustments are made to other income for the credit amounts for the following cred-
its:

• Form 6478, Biofuel Producer Credit

• Form 8864, Biodiesel and Renewable Diesel Fuels Credit
• Form 8912, Credit to Holders of Tax Credit Bonds (interest income)

Adjustments are made to the appropriate deduction/expenses for the credit amounts
for the following credits:

• Form 5884, Work Opportunity Credit

• Form 6765, Credit for Increasing Research Activities
• Form 8820, Orphan Drug Credit
• Form 8844, Empowerment Zone and Renewal Community Employment Credit
• Form 8845, Indian Employment Credit
• Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Cer-
tain Employee Tips
• Form 8881, Credit for Small Employer Pension Plan Startup Costs
• Form 8932, Credit for Employer Differential Wage Payments
• Form 8941, Credit for Small Employer Health Insurance Premiums

Tax Year 2016 41

Adjusting Charitable Contributions/NOL Drake Tax Manual Supplement: Corporations

Adjusting Charitable Contributions/NOL

Corporations with a net operating loss (NOL) carryover from any taxable year must
apply the special rule of IRC section 170(d)(2)(B) for charitable contributions. The
rules are designed to prevent a double tax benefit through interaction of NOL and
charitable contribution carryovers. The excess charitable deduction can reduce taxable
income only once. Under these rules, a corporation’s charitable contributions carry-
over (but not the NOL carryover) must be reduced to the extent the charitable contri-
bution deduction, in computing the taxable income of an intervening year, would
increase the NOL to a succeeding year.

Limitation on The total amount claimed cannot be more than 10% of taxable income (line 30) com-
Deduction puted without regard to the following:

• Any deduction for contributions

• The special deductions on line 29b
• The deduction allowed under section 249
• The domestic production activities deduction under section 199
• Any net operating loss (NOL) carryback to the tax year under section 172
• Any capital loss carryback to the tax year under section 1212(a)(1)

To prevent the double benefit from the excess charitable contribution deduction when
there is a charitable contribution on the return and an NOL carryover, the program
makes the IRC section 170(d)(2)(B) adjustment. In this situation, the charitable contri-
bution carryover amount is reduced on column C of the Contribution Limitation/Car-
ryover worksheet (WK_CNTRB in View mode), and the NOL carryforward is
increased on the ATT_NOL worksheet.

Elections
The ability to make certain tax elections is included in the business packages. Elec-
tions are selected from the Return Elections section of the ELEC screen (Figure 12).

Figure 12: Return Elections portion of ELEC screen

42 Tax Year 2016

Drake Tax Manual Supplement: Corporations Elections

Making an Election in Drake

To indicate that the corporation is making an election:

1. Open the ELEC screen (accessible from the Miscellaneous tab of the Data Entry
Menu (or by typing ELEC in the selector field and pressing ENTER).
2. Make a selection from the Election drop list (Figure 13).

Figure 13: Election drop list

3. Complete all other fields as applicable. Press F1 in any field to learn if a field is
required for your selection and the type of information that may be needed. For
example, the help text for the Date or year-ending field shows that the field is
required only for election options 08, 09, 11, and 15, and it explains what, specifi-
cally, should be entered for each of these elections.

Figure 14: Help text for Date or year-ending field on ELEC screen

If the election option you selected is not listed in the help text for a field,

NOTE then that field should be left blank. For example, if you chose election
“01 - General Election Statement,” you would not need to enter any-
thing into the Date or year-ending field (help text in Figure 14).

To open a new ELEC screen for an additional election, press PAGE DOWN.

Election Statements
Once an election is made and the return is calculated, the election information is pro-
duced on a statement referenced “STM ELXX,” where “XX” is the number of the
election. For example, election “01 - General Election Statement” is generated as
Statement EL01.

Tax Year 2016 43

Making Changes on the Fly Drake Tax Manual Supplement: Corporations

The election statement includes the election title, election wording, and any additional
information required for the election, such a date or amount.

Entries for certain fields are sometimes included in the actual election statement; other
times, they are included as separate lines. Signature lines are printed as needed on
some statements.

Safe Harbor Elections

A check box on screen 4562 allows you to apply a small taxpayer Safe Harbor elec-
tion to the building listed in the Description field. An election statement will be pro-
duced and the building description as entered in the Description field will be included
in the election statement.

This election can also be made from the Election drop list on the ELEC
NOTE screen.
This Safe Harbor election covers buildings only.

See IRS Reg. section 1.263(a)-3(h), IRB 2013-43, Rev. Proc. 2014-16, and Rev. Proc.
2015-14 for guidance.

Another safe harbor election available from the Elections drop list on the ELEC
screen is the Sec. 1.263(a) - 1(f) de minimis safe harbor election.
Election statements are generated with the return (Figure 15).

Figure 15: Election statement generated with ELEC screen selection

Making Changes on the Fly

Use the PRNT screen to override most program defaults.

Suppressing/Forcing Documents
To suppress or force the printing of certain documents, go to the PRNT screen and
select the desired options. Many “on-the-fly” changes override the options established
in Setup.
You can force the program to print the following 1120 items on a return:

• Form 1125-E

44 Tax Year 2016

Drake Tax Manual Supplement: Corporations Making Changes on the Fly

• Schedules G (1120-C), L, M-1, and M-2

• Form 4562
• Next-year depreciation listing
• Inactive returns
• PIN for the preparer’s alternative electronic signature

Form 1125-E is required if total receipts (line 1b + lines 4 through 10)

NOTE are $500,000 or more.

Schedules L, M-1, and M-2 are not required if receipts and total assets
(Schedule K, line 13) are less than $250,000.

The PRNT screen can also be used to suppress printing of the following items on a
return:

• Form and attachment references (References are printed by default.)

• Form 4626, Alternative Minimum Tax—Corporations

Calculation and Other Options

The following calculation and other options are available:

• Calculate Form 2220 penalty — Select this box to have the program calculate
the penalty for Form 2220, Underpayment of Estimated Tax by Corporations.
(The program retains the rates as of 12/31 of the calendar year. If a corporation
has a fiscal year end, the preparer must enter the effective rates manually.)
• Do not calculate WK_1120W based on 2016 taxable income — The Wks
1120W is an estimated tax worksheet based on the current tax year taxable
income. Select this box to stop generation of this worksheet.
• Calculate Form 4466 (application for quick refund) — Form 4466, Corpora-
tion Application for Quick Refund of Overpayment of Estimated Tax. (A check
mark in this box is the only entry needed to generate the form.)
• Turn off autobalance — For more information on the autobalance feature in
Drake, see “Autobalance” on page 36.
• Prepare Form 7004 extension based on screen 1 info — Select this box to pre-
pare a six-month extension based on the information that has already been entered
into the return. Note that screen 1 must be completed to prepare an extension.

NOTE To prepare Form 7004 based on information other than (or in addition
to) that provided on screen 1, use the 7004 screen.

Overriding Other Setup Options

The following program defaults can be overridden from the PRNT screen:

• Filing instructions (federal and state)

• Envelope coversheets (corporation, IRS, state, and city)
• Date to print on return

Tax Year 2016 45

Electronic Filing Drake Tax Manual Supplement: Corporations

• Due date to print on letter and filing instructions (see note below)
• Amount on Form 1120, page 1, item D (“Total assets”)
• IRS Service Center

A default due date for filing is printed on all letters and filing instruc-

NOTE tions generated with a return. You can override the default by enter-
ing an alternate due date in the Due date to print on letter and
filing instructions field on the PRNT screen.

Electronic Filing
Steps for e-filing Form 1120 are the same as for e-filing Form 1040, with the excep-
tion of bankruptcy returns, which must be paper-filed.

Common Reject Codes

If one or more of the following IRS reject codes are generated when you e-file an 1120
return, you must contact the IRS for further information. The IRS e-Help Desk tele-
phone number is (866) 255-0654.

• Reject Code F1120-307-01 — Filer’s TIN and “Name Control” in the return
header must match data in the e-file database unless Form 1120, Item E (3), check
box “Name Change” is marked.
• Reject Code R0000-900-01 — The return type indicated in the return header
must match the return type established with the IRS for the EIN.
• Reject Code R0000-905-01 — Electronic Filing Identification Number (EFIN) in
the return header must be listed in the e-file database and in “accepted” status. If
you get this reject code, you must update your e-file application to include the
1120 return type. This should be done at the IRS website. Review publication
3112 for details.
• Reject Code R0000-932-01 — If “Amended Return” or (Superseded for 1120/
1120S) check box is not selected, then Taxpayer TIN in the return header must not
be the same as a TIN of a previously accepted paper return for the return type and
tax period indicated in the tax return.
• Reject Code R0000-933-01 — If “Amended Return” or (Superseded for 1120/
1120S) check box is not selected, then Taxpayer TIN in the return header must not
be the same as a TIN of a previously accepted electronic return for the return type
and tax period indicated in the tax return.

Special Types of Returns

This section covers 52-53–week year returns and inactive returns. Both types of
returns can be e-filed using Drake.

Electing a 52-53–Week Year (Initial Return)

To elect a 52-53–week year, a new entity (one that has never filed a return) must enter
data on both screen 1 and the Year screen.

46 Tax Year 2016

Drake Tax Manual Supplement: Corporations Special Types of Returns

To elect a 52-53–week year for any entity:

1. In the If not calendar year section of screen 1, enter the Fiscal year begins and
Fiscal year ends dates. Use the MMDDYYYY format, as shown in the example
in Figure 16.
2. Mark the 52-53-week tax year box.

Figure 16: In this example, the fiscal year begins 09/21/2016 and ends 09/27/2017
(the Wednesday closest to the end of September), giving the entity a 53-week year for 2017.

An entity that has filed returns in the past must complete only steps 1
NOTE and 2 of this process. An entity that has never filed a return before must
continue with steps 3 through 6.

3. Click the Year link to open the Short-Year Election screen (Figure 17).

Figure 17: Elections for 52-53-week tax years

4. For line 1, select the month in which the 52-53–week year ends for the current fis-
cal year. (01 = January, 02 = February, etc.)
5. For line 2, select the day of the week the tax year always ends.
6. For line 3, enter the actual date that the tax year ends (the same date entered in the
Fiscal year ending field on screen 1).

Once a 52-53–week year is selected, the entity must use that account-

NOTE ing period every year. To change accounting periods, the entity must
submit to the IRS Form 3115, Application for Change in Accounting
Method.

In subsequent years, only the 52-53–week tax year check box on screen 1 must be
marked; the program automatically updates the dates.

Inactive Returns
Entities that are inactive but still required to file returns may e-file inactive returns in
Drake. To indicate that a return is inactive:

1. Go to the PRNT screen, accessible from the General tab.

Tax Year 2016 47

Binary Attachments Drake Tax Manual Supplement: Corporations

2. Under Items to Print, mark the Print inactive return box.

When the return is calculated, the program displays the words “Inactive Return” on
the main form of the return (specifically, in the box above line 1c). Zeros (“0”) are dis-
played where required by the IRS in order for amounts to be properly included in the
e-file data.

IMPORTANT All EF Messages must be cleared in order to e-file an

inactive return.

For detailed instructions on e-filing returns in Drake, see 2016 Drake Tax User’s Man-
ual.

Binary Attachments
Binary, or PDF, files can be attached to certain tax forms. These attachments are gen-
erally signature or third-party documents such as a copy of a signed lease or a signed
appraisal statement. In some instances, the IRS requires that a document be attached
to an e-filed return; in other instances, a document can be attached voluntarily to sup-
port or explain an entry in the return. In either case, a PDF must be available to be
attached to the return in order to be e-filed with the return.

Attach files through the PDF Attachments screen, accessible from the Electronic
Filing section on the General tab of the Data Entry Menu.

The PDF Attachment Process

Three main steps are involved in the PDF attachment process in Drake:

1. Creating a PDF file to be attached

2. Informing the program that a PDF file will be sent with the return
3. Attaching the PDF file for e-filing
These steps are described in the following sections.

Creating a To create a PDF file:

PDF File
1. Scan the document to be attached to the return as a PDF document.

TIP It’s a good idea to use the Drake Documents (formerly DDM) scanning
feature for this step.

2. Save the document to your client’s Drake Documents file, your computer’s desk-
top, or anywhere you can readily find it.

Many types of documents (for instance, documents created in Micro-

NOTE soft Word) can be printed or “saved” as PDF files if you have a PDF
printer (such as Adobe Reader) installed.

48 Tax Year 2016

Drake Tax Manual Supplement: Corporations Binary Attachments

Adding PDF To indicate in the software that a PDF file will be sent with the return:
Files
1. Open the return in Drake Tax.
2. From the Data Entry Menu, click PDF Attachments, accessible from the Elec-
tronic Filing section of the General tab (or type PDF in the selector field and
press ENTER).
3. Fill out the columns on the screen. See Table 3 for examples.
Table 3: PDF Attachment Window Columns

Column Description Examples

Reference Source Name or number of regulation, - IRS Pub xxx-1.4
(This field is for your publication, or form instruction that - Form Instructions for 1120
records only; it is not makes attachments necessary
transmitted with the
PDF.)

Description Description of form or document to - Title of house on Oak Street

be attached - Appraisal of Lot 1234

File name Distinctive, easily recognizable file - TitleHouseOakSt.pdf

name, followed by “.pdf” - AppraisalLot1234.pdf

4. Exit the PDF screen.

Because you’ve indicated that a PDF file is attached, the program generates an EF
Message regarding the attachment when the return is calculated.

Attaching To attach a PDF file to a return:

Documents
to the Return 1. From the return, click View. If anything was entered on the PDF screen, there will
be three PDF–related items in the View/Print window:
• A red MESSAGES alert (see item #1 in Figure 18 on page 50)
• An “EF PDF” worksheet that lists all items entered on the PDF screen (item
#1 in Figure 18 on page 50)
• An Attach PDF button on the toolbar (item #2 in Figure 18 on page 50)

Tax Year 2016 49

Form 3115, Application for Change in Accounting Method Drake Tax Manual Supplement: Corporations

Figure 18: The red MESSAGES file and the Attach PDF button

2. Click the MESSAGES file to view the EF Message which provides information
on how to attach the required documents to the return.
3. Click the Attach PDF button in the toolbar at the top of the window. The EF PDF
Attachments window (Figure 19) displays the information entered on the PDF
Attachments window in data entry. A red X means the document has not yet been
attached; a green check mark indicates an attached document.

Figure 19: The EF PDF Attachments window

4. Click the row of a document to attach (one with a red X).

5. Click Browse.
6. Find the proper folder, select the PDF file to attach, and click Open (or double-
click the file name).

Repeat for all documents with a red X. When all documents have been attached to a
completed return, recalculate the return to make sure all EF messages have been
cleared. If so, the return is ready to be e-filed.

Form 3115, Application for Change in Accounting Method

Form 3115, Application for Change in Accounting Method, is an application to the
IRS to change either an entity’s overall accounting method or the accounting treat-
ment of any material item.

50 Tax Year 2016

Drake Tax Manual Supplement: Corporations Form 3115, Application for Change in Accounting Method

Form 3115, Application for Change in Accounting Method, is eligible for e-file, but
an additional copy of the form must be mailed to the IRS national office unless the
Appendix of Rev. Proc. 2011-14 of other published guidance requires the copy to be
filed with the IRS office in Ogden, UT. (See IRS instructions for details.)

Drake Tax customers can fill out and e-file Forms 3115 and related schedules and
attachments for corporation returns.

Accessing Screens for Changing Accounting Method

Several screens may be required to complete Form 3115. These screens are accessible
from the Change in Accounting Method box, located under the second Other
Forms tab of the Data Entry Menu (Figure 20).

Figure 20: Screens for Form 3115, Application for Change in Accounting Method

The screens accessible from the Change in Accounting Method section include:

• Screen 3115 (Change in Accounting Method) — Used to access fields for Form
3115, including Schedules A through D
• Screen 311E (Schedule E) — Used to request a change in depreciation or amorti-
zation methods
• Screen ATT (Explanations and Attachments) — Used to create and view cer-
tain attachments to be generated by the software
• Screen ATT2 (Pt II Ln 14 & Pt III Ln 24b Attachment) — Used to complete
certain parts of Form 3115 that require specific attachments

Multi-form All 3115 and related screens contain a Multi-form code text box (shown in
Codes Figure 21 on page 52) that allows you to link a screen or attachment to a particular
Form 3115.

If submitting more than one Form 3115, assign a multi-form code to each new appli-
cation you create in Drake Tax. The first should be “1,” the second “2,” and so on.
When using other screens, such as the 311E or ATT screens, you can use those num-

Tax Year 2016 51

Form 3115, Application for Change in Accounting Method Drake Tax Manual Supplement: Corporations

bers to indicate with which instance of Form 3115 the 311E or ATT screen should be
associated.

NOTE If only one Form 3115 is being submitted, you do not need to enter any-
thing in the Multi-form code box.

Form 3115 Screens

When you open the 3115 screen from the Data Entry Menu, the program displays the
first of five 3115 screens. These five screens are:

• Part I (Form 3115, Part I)

• Part II (Form 3115, Part II)
• Parts III, IV (Form 3115, Parts III and IV)
• A, B, C (Form 3115, Schedules A, B, and C)
• D - Parts I, II (Form 3115, Schedule D, Parts I and II)
• D - Part III (Form 3115, Schedule D, Part III)

As shown in Figure 21, you can access these 3115 screens by clicking a link at the top
of any of the 3115 screens.

Figure 21: Tab links on 3115 screen

For details on how to file Form 3115, see IRS Revenue Procedure 2015-13.

Applicants filing Form 3115 should refer to Rev Proc. 2015-13 for gen-

NOTE eral automatic change procedures, and to Rev Proc. 2015-14 for a list
of automatic changes to which the automatic change procedures in
Rev. Proc. 2015-13 apply.

See Screen Help (accessible from the 3115 screen toolbar, from the

TIP right-click menu, or by pressing CTRL+ATL+?) to access links to Reve-

nue Procedures 2015-13, 2015-14, and 2015-20 through the IRS web-
site.

Notices of In addition to Form 3115 and related schedules and statements, the program produces
Missing EF Messages (as applicable) when the return is calculated. All forms, schedules, EF
Attachments Messages, and worksheets are accessible from View mode.

EF Messages for Form 3115 provide information about required attachments (includ-
ing PDF attachments) that are missing from the return. Some messages list all state-

52 Tax Year 2016

Drake Tax Manual Supplement: Corporations Importing Trial Balance Information

ments required for a particular section but do not indicate which statements,
specifically, are missing. To best understand which attachments are still required,
compare the ATT screen and the “EF PDF” worksheet to the list on the EF Message.

All EF Messages must be eliminated before the return is eligible for

NOTE e-file. EF Messages for Form 3115 attachments are eliminated
when all required statements have been attached to the return.

Importing Trial Balance Information

Drake Tax’s trial balance import feature allows data to be imported into an 1120 return
from a trial balance worksheet. The trial balance template and importing function has
the following benefits:

• Eliminates the need to duplicate entries

• Reduces data entry errors by automatically importing data to the correct fields
• Allows preparers to merge basic accounting functions with tax preparation

NOTE A flow chart of the trial balance importing process is available as

Appendix A, Trial Balance Import (pages A-1 to A-2 of this manual).

Preparing to Use Trial Balance Import

The trial balance import function can be used only on returns that were created in
Drake 2008 or later. Like several other functions of the tax software, this feature
requires Microsoft Excel (version 2000 or later).

First, if you haven’t already, create a client file (open a new return) in Drake Tax 2016
or update an existing client file from the prior year. Then create a trial balance work-
sheet. (See “Opening a Template” on page 54.)

Then take the following steps to ensure the trial balance import works properly:

• Activate Macros — The trial balance import function uses macros in Microsoft
Excel. Check your Excel settings to ensure that macros are activated and that
macro settings are set to “Disable all macros with notification.” To do so, go to
File > Options in Excel and select the Trust Center tab. Click Macro Settings
and select Disable all macros with notification, then click OK.

In Excel 2007, click the Office button in the upper left and then click
the Excel Options button at the bottom of the window. (In Excel
2013, click the File tab then select Options from the menu on the
NOTE left.) Next, select Trust Center from the list at left, then click the Trust
Center Settings button. Select Macro Settings from the list on the
left, then choose Disable all macros with notification. Click OK and
then OK.

• Disable Autobalance in Drake Tax — (optional) When autobalance is disabled,

the program is prevented from automatically adjusting the year-end retained earn-
ings or capital amounts, thus allowing you to see any discrepancies in the balance

Tax Year 2016 53

Importing Trial Balance Information Drake Tax Manual Supplement: Corporations

sheet. To disable autobalance in Drake Tax, go to the PRNT screen and select
Turn off autobalance.
• Force Schedule L — By default, the program does not display the balance sheet
amounts on the return if the corporation does not meet the filing requirement. If
this is the case, you will have to override the default setting in order to have the
amounts displayed on Schedule L. To force the Schedule L amounts to be printed,
go to the PRNT screen and select the applicable check box (Figure 22).

Figure 22: Check box for forcing Schedule L

• Check for Detail Worksheets — The trial balance import allows only those
detail worksheets required by the IRS. Check updated returns for detail
(CTRL+W) worksheets that are not required. For example, the IRS does not
require a detail worksheet for the Gross receipts or sales field on the INC screen;
if a return has a detail worksheet for that field, the trial balance will not be
imported correctly into the return. Detail worksheets are indicated by red shading,
as shown in Figure 23.

Figure 23: Example of an “unnecessary” detail worksheet

Remove unnecessary detail worksheets prior to import. See “Detail Worksheets”

on page 56 for more information on using detail worksheets in the trial balance.

Preparing Financial Data for Import

To prepare the financial data for importing into the return, the data must be entered
into Drake Tax’s specially designed trial balance template. Once this information is
entered and saved, it can be imported into the return.

Opening a The first step in preparing financial data for importing is to open a trial balance tem-
Template plate for the return and enter the financial data.

To open a trial balance template for a return:

54 Tax Year 2016

Drake Tax Manual Supplement: Corporations Importing Trial Balance Information

1. Open the return to the Data Entry Menu.

2. Click Import > Trial Balance Import from the toolbar. The preliminary Trial
Balance Import dialog box is opened.
3. Click Create New or Open Existing. If opening an existing file, click Open after
selecting the correct file.
4. If a Security Warning box appears, click Enable Macros.

In Excel 2007 and 2010, you may see a Security Warning message

NOTE with an Options button. Click Options to open the Security Options
dialog box, then select Enable this content. Click OK. (In Excel
2013, click Enable Content.)

The trial balance template is displayed in Microsoft Excel.

File Location Whenever a new template is opened, the tax software assigns it a default file location
and name. Trial balance templates are saved in the “TB” folder of your Drake16 pro-
gram.

To change the name of a file in Excel, select File > Save As and assign the new name.

If saving a trial balance to a different location, make a note of where

NOTE you are storing it. The program automatically looks in the default
directory.

Template The trial balance template consists of three title rows and six columns. The Entity
Structure Name and Year End title rows can be edited; double-click a row to change the title.
Columns are described in Table 4.

Table 4: Trial Balance Template Columns

Column Description
Account Title Title of account

Debit/Credit Debit and credit amounts

Import to Screen and line in Drake to which the debit or credit

amount is imported

Form, Page, Sch, and/or line Location of the amount on the printed return

Other Information Additional details for preparers; see “Details for Pre-
parers” on page 59.

Displayed at the bottom of the trial balance worksheet are the calculated amount for
Schedule M-1, line 1; the credit and debit totals; and a cell showing whether or not the
balance sheet is out of balance and, if applicable, the out-of-balance amount
(Figure 24 on page 56; see also Figure 27 on page 57).

Tax Year 2016 55

Importing Trial Balance Information Drake Tax Manual Supplement: Corporations

Figure 24: Schedule M-1 amount (1); totals (2); and indication of balance (3)

Following are instructions and guidelines for using the trial balance template to
assemble financial data for importing into data entry.

Entering Financial Data

When a new trial balance file is opened for a return, all debit and credit amounts are
zero ($0). All data must be entered manually into the template.

Some data cannot be imported from the trial balance worksheet into

NOTE the tax program and must be entered directly into the data entry fields
within the program. For more on these categories of data, see “Spe-
cial Conditions” on page 59.

Direct Entry Most cells in the trial balance worksheet are view-only. In a new template, editable
debit and credit cells are indicated by a dollar amount ($0).

Detail Some cells require more detail than can be entered on a single line. These cells are
Worksheets indicated by buttons (Figure 25). (Buttons do not work if macros are disabled; see
“Opening a Template” on page 54.)

Figure 25: Example of cells that require worksheets

Click a worksheet button to open a worksheet in a new tab. Figure 26 on page 57

shows an example of the “Other Income” worksheet.

56 Tax Year 2016

Drake Tax Manual Supplement: Corporations Importing Trial Balance Information

Figure 26: Trial balance worksheet for “Other Income”

To return to the previous worksheet, click the Corp TB tab (labeled “1” in Figure 26),
or the Click to Return button above the worksheet tabs (labeled “2” in Figure 26).
Note that a detail tab (the “Other Income Detail” button labeled “3” in Figure 26)
might include one or more detail worksheets.

Do not create detail worksheets in data entry of Drake Tax if the trial
NOTE balance worksheet does not provide an equivalent detail worksheet;
otherwise, the trial balance will not be imported correctly.

Totals Totals are displayed at the bottom of each worksheet. If credit and debit columns are
out of balance, the worksheet highlights the out-of-balance amount (Figure 27).

Figure 27: Out-of-balance amount is highlighted if columns are out of balance.

Tax Year 2016 57

Importing Trial Balance Information Drake Tax Manual Supplement: Corporations

In addition to credit and debit totals, the main trial balance worksheet displays the net
income (loss) to be calculated for line 1 of Schedule M-1 after all entries and adjust-
ments are made in the software (see Figure 22 on page 54).

NOTE The data cannot be imported if the worksheet is out of balance.

Saving a File
To save a file, click the Save icon or select File > Save from the menu bar. (In Excel
2007 and 2010, click the Office button in the upper-left corner and select Save. In
Excel 2013, click the File tab then Save.) To re-name a file when saving, select File >
Save As. Trial balance templates are saved in the “TB” folder of your Drake16 pro-
gram.

Importing Data into a Return

Once a trial balance worksheet has been set up for a client in Drake Tax, the trial bal-
ance information can be imported into the program and calculated into the return.

Not all trial balance data can be imported directly into a return. For
information on program limitations, see “Special Conditions,” following.
NOTES If you are already in the Trial Balance Import tool for the selected return,
go to the Trial Balance Import window in Drake Tax and start at Step 3
of the following procedure.

To import a trial balance into a return:

1. Open the return to which you will import the trial balance information.
2. Click Import > Trial Balance Import from the menu toolbar. The preliminary
Trial Balance Import dialog box is opened. Click Next.
3. Enter or select the trial balance file to be imported. Use the Browse feature if nec-
essary. By default, each trial balance file is an Excel (.xls) file displaying the cli-
ent’s name and ending in “TB” for trial balance, as shown in the example in
Figure 28. (See “File Location” on page 55.)

Figure 28: Selected file to import

4. Select the Trial Balance Additional Import Options. (See “Additional Import
Options” following this procedure.)
5. Click Next and wait for the import to be completed.
6. Click Finish.
The program returns to the Data Entry Menu for the open return. Note that all
selected data from the trial balance worksheet has been imported into the return. This
can be seen both in the data entry screens and on the generated return.

58 Tax Year 2016

Drake Tax Manual Supplement: Corporations Importing Trial Balance Information

Additional The program can import the following additional information when importing the trial
Import balance data: Select the items to import or click Select All then click Next.
Options
Buildings & other depreciable assets Accumulated depreciation
Goodwill & other intangible assets Land
Accumulated amortization Cost of goods sold (COGS) depreciation

Special Conditions
Some trial balance items cannot be entered into the trial balance worksheet and must
be typed directly into Drake Tax data entry. Other items should be entered into the
worksheet for balance purposes but are not carried to data entry; these must be entered
separately and the calculated results compared to the trial balance worksheet.

Details for Most trial balance items are imported directly to the location indicated in the program
Preparers and on the return. For example, the amounts shown in Figure 29 go to Schedule L, line
1, column d in the program and are shown on page 5, line 1, column d of the 1120
return.

Figure 29: Trial balance worksheet indicates where an amount

will go in Drake Tax and on the return

Other Info The “Other Information” column in the trial balance worksheet indicates special con-
Column ditions and additional information regarding certain rows. Table 5 describes the most
common notes in this column.

Table 5: “Other Information” Column Notes

Note Description
not included in totals The amount is required for importing purposes only but
is not included in the totals shown on the trial balance.

does not import Information cannot be imported and must be entered on

the appropriate screen in Drake Tax. Screen is specified
in “Form, Page, Sch...” column to the left of “Other Infor-
mation.”

optional Amount is optional; not required for import, but could

require direct entry in the software.

(enter deficit as negative) Some deficits must be entered as negative numbers.

Tax Year 2016 59

Importing Trial Balance Information Drake Tax Manual Supplement: Corporations

Table 5: “Other Information” Column Notes

Note Description
import includes the calculated Used for “total purchases;” when calculating cost of
change in inventory goods sold (COGS) in the return, the program takes the
change in inventory into account for the Schedule A cal-
culation.

[Form or Schedule] may be Non-financial information (such as names of officers for

required a Schedule E) must be completed in Drake, in addition
to the financial data entered in the worksheet.

All “does not import” notes are accompanied by further instructions in the column to
the left of the “Other Information” column, as shown in Figure 30.

SCH2 Detail Typically, a balance sheet subsidiary schedule (SCH2 detail screen for Schedule L) is
required for an item marked “does not import” on the trial balance worksheet
(Figure 30).

Figure 30: SCH2 screen required for “does not import” items

To complete an SCH2 detail screen in data entry of the tax program:

1. Open the SCH2 screen for the return.

2. Select the line number from the Line Number drop list.
3. Enter the applicable item descriptions and beginning- and end-of-year totals.

NOTE Alternately, open screen L and click the SCH2 Screen link for the line
your wish to enter.

To enter details for additional lines of the Schedule L, press PAGE DOWN and repeat
steps 2 and 3. Data is saved automatically upon entry.

60 Tax Year 2016

Drake Tax Manual Supplement: Corporations Importing Trial Balance Information

When the return is produced, the Schedule L of the return reflects both the amounts
imported from the trial balance worksheet and the totals of the amounts entered on the
SCH2 screen.

Depreciation On an 1120 return, total depreciation consists of COGS depreciation, which is

reported on Form 1125-A, Cost of Goods Sold, and any remaining depreciation,
which is reported on page 1 of the return. For trial balance purposes, enter deprecia-
tion amounts directly into the appropriate fields on the trial balance worksheet.

When the trial balance is imported, the COGS depreciation expense amount flows
directly to the appropriate line of Form 1125-A on the return. Because the remaining
depreciation can comprise any number of assets, the amount entered on the trial bal-
ance does not flow to the return. To ensure that each component of the total remaining
depreciation is calculated into the return, each asset must be entered on the applicable
depreciation screens in data entry.

Entering the remainder of the depreciation on the trial balance work-

sheet helps ensure that the balance sheet balances and provides a
way to check that the amount on line 1 of Schedule M-1 is correct.
NOTE Compare the calculated line 1 at the bottom of the trial balance to the
equivalent line on Schedule M-1 of the calculated return. If the depre-
ciation amounts match but the line 1 amounts differ, an M-1 adjust-
ment could be required.

“EF Notice” Page

Similar to federal Form 9325, Acknowledgment and General Information for Taxpay-
ers who File Returns Electronically, generated with 1040 returns, the federal and state
business packages now generate an “EF Notice” page for the main forms of federal
returns and “(ST)EF_ACK” page for the main forms of state returns.

This is a Drake-generated form that serves the same purpose as Form 9325: an
acknowledgment that a return has been transmitted through Drake Software and
received by the IRS or the applicable state agency.

When a return is e-filed and you receive a “P” ack (indicating that the return is being
processed) or an “R” ack (for a rejected return), the top section of the EF Notice is
completed, noting the name and address of the client, the return type, the ERO who
transmitted the return, and a check mark indicating the return was received by the IRS
or applicable state agency.

When you download and process your acknowledgments and receive an “A” ack, the
second section of the EF Notice is generated, indicating the return was accepted by the
IRS or state agency and the date the return was accepted. The submission ID number
is also included.

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Importing Trial Balance Information Drake Tax Manual Supplement: Corporations

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62 Tax Year 2016

Drake Software User’s Manual

Appendix A: Trial Balance Import

The trial balance import allows data to be imported into a corporate tax return from a
trial balance worksheet.

Drake’s specially designed trial balance template and importing function has the fol-
lowing benefits:

• Eliminates the need to duplicate entries

• Eliminates data entry errors by automatically importing data to the correct fields
• Allows preparers to merge basic accounting functions with tax preparation

See next page for a flow chart describing the use of the trial balance import.

Tax Year 2016 A-1

 Trial Balance Import: General Process
YES

1120S & 1065:

990, 990‐EZ, or Compare M‐1, line 1: Does trial balance 1120 Were rental totals entered
Prepare to use Trial NO YES return?
NO
990‐PF return? match Schedule M‐1, line 1? in trial balance?
Balance Import
‐ Enable Excel macros
‐ Disable autobalance
‐ Force Schedule L NO YES
‐ Delete unnecessary detail worksheets

Go to data entry an
Did data enter individual
import rentals on 8825 or
correctly? RENT screens as
Populate Trial Balance applicable
NO YES
Template
(Import > Trial Balance Import)
I
‐ direct entry data (cells with $0)
‐ applicable detail worksheets
M Make Delete imported
corrections in 8825 and RENT
‐ totals for:
‐ depreciation
‐ Schedule L
P TB worksheet screens
NO
‐ rentals (1120S & 1065 only)
O Is an M‐1
adjustment

R YES
necessary?

NO
Populate Data Entry T
Enter any trial balance data that cannot be
imported via Trial Balance Import
Adjust Make M‐1
‐ Screen SCH2 for Schedule L items amounts adjustment
‐ Screen 4562 for individual assets elsewhere in
(depreciation) data entry

Process
complete!
Drake Tax Manual Supplement: Corporations Index

Index

A controlled groups 21, 40

converting to 1120 11
accounting method
cost of goods sold, see Schedule A (Cost of Goods Sold)
changing 50, 50–53
coversheets 45
address
change of 13 credit for tax on fuels 16
credits
e-mail 32
carrybacks and carryforwards 22
entering on Form 1120 12
credits and adjustments 41
adjustments and credits 41
Ctrl+W (detail) worksheets 15, 54
advertising expenses 20
affiliated groups 28
alternative minimum tax (AMT) 40 D
amended returns 27 data entry
amortization 21, 34 trial balance import 56
APPLD FOR 17, 30 debts, bad 18
apportionment deductions and income 14–21
plan status 41 depletion 20
attachments oil and gas 10, 20
binary 48–50 depreciation
PDF, see PDF files and auto-balance errors 37
to Form 3115 51 expense 19
auto-balance 36, 45 for cost of goods sold (Schedule A) 15
on short-year returns 13
B trial balance (business returns only) 61
detail (Ctrl+W) worksheets 15, 54
bad debts 16, 18
bankruptcy 46 detail) worksheet 15
book-to-tax difference (Schedule M-1) 37 direct debit of balance due 24–25
brother-sister group 41 Domestic Production Activities 21
domestic production activities deduction 21

C
E
calendar years 13
capital gains and losses 16 EF_ACK page 61
e-filing
carryover of NOLs 21, 42
new features in Drake 46
Change in Accounting Method 50–53
PDF documents 48–50
change of name or address 13
Elections
Changes on-the-fly 44
Safe Harbor 44
charitable contributions 19, 42
electronic
codes
funds withdrawal (direct debit) 24
error/reject 46
signatures (PIN) 26
miscellaneous (screen 1) 34
employee benefits 20
multi-form 51
entertainment and meals 21
state 32
envelope coversheets 45
combined group 41
compensation of officers 17 estimated tax worksheet 45
consolidated returns 15 estimates 23, 45
contact information (for state returns) 32 exporting K-1 data 31
contributions, charitable 19, 42 extensions 25–26, 45

Tax Year 2016 lxv

Index Drake Tax Manual Supplement: Corporations

F GBC screen 22
General Business Credits 22
filing instructions 45
gross receipts 14
final returns
indicating in the program 13
updating 11 H
fiscal year returns 13 header information 12
foreign
tab 10
foreign ownership 29 I
FOREIGNUS 17, 30 importing trial balance 53–61
Form 1120-C (U.S. Income Tax Return for Cooperative inactive returns 47
Associations) 12 income and deductions 14–21
Form 1120-H (U.S. Income Tax Return for Homeowners instructions for filing 45
Associations) 12 insurance proceeds, income from 16
Form 2220 (Underpayment of Estimated Tax By Corpora- interest
tions) 23, 45 expense 19
Form 3115 (Application for Change in Accounting Meth- income 15, 16
od) 50–52 inventory 14
Form 3800
Unsupported credits 22
Form 4466 (Corporation Application for Quick Refund of K
Overpayment of Estimated Tax) 23, 45 K-1 export 10
Form 4797 (Sales of Business Property) 16
Form 5884 (Work Opportunity Credit) 41 L
Form 6252 (Installment Sale Income) 15
Form 6478 (Alcohol and Cellulosic Biofuel Fuels Credit) life insurance companies 41
16, 41 limitations
meals and entertainment 21
Form 6765 (Credit for Increasing Research Activities) 41
on NOL deductions 42
Form 7004 (Application for Automatic Extension of Time
to File) 26, 45
Form 8050 (Direct Deposit of Corporate Tax Refund) 24 M
Form 8820 (Orphan Drug Credit) 41 M-2 out of balance, troubleshooting 39
Form 8844 (Empowerment Zone and Renewal Community maintenance costs 18
Credit) 41 meals and entertainment 21
Form 8845 (Indian Employment Credit) 41 Multi-State Apportionment 32
Form 8846 (Credit for Employer Social Security and Medi-
care Taxes Paid on Certain Employee Tips) 18, 41
Form 8864 (Biodiesel and Renewable Diesel Fuels Credit) N
16, 41 net operating losses (NOL) 21, 42
Form 8873 (Extraterritorial Income Exclusion) 21 new features in Drake 9
Form 8881 (Credit for Small Employer Pension Plan Start- next-year depreciation listing 45
up Costs) 41
Form 8903 (Domestic Production Activities Deduction) 21
Form 8912 (Credit to Holders of Tax Credit Bonds) 41 O
Form 8932 (Credit for Employer Differential Wage Pay- officer compensation 17
ments) 41 oil and gas depletion 10, 20
Form 8941 (Credit for Small Employer Health Insurance ordinary gains and losses 16
Premiums) 41 Other Deductions 21
Form 8941 (Credit for Small Employer Health-Insurance other income (loss) 16
Premiums) 21 out-of-balance M-2, troubleshooting 39
ownership
foreign 29
G of stock 28–30
gains and losses 16

lxvi Tax Year 2016

Drake Tax Manual Supplement: Corporations Index

percentages 17 Schedule M-1 (Reconciliation of Books with Return) 37,

45
Schedule M-2 (Unappropriated Returned Earnings) 39, 45
P Schedule M-3 (Reconciliation of Books with Return) 38
parent-subsidiary group 28, 40 Schedule O (Consent Plan & Apportionment Schedule for
PDF documents a Controlled Group) 40
e-filing 48–50 section
Pension and Profit-Sharing 20 263A costs 14
percentage, stock and ownership 17 481 16
PIN (electronic) signatures 26 security
printing business packages 9
statements for Schedule L 36 short-year return 13
suppressing/forcing 44 signatures, electronic (PIN) 26
prior-year returns, updating 11 signing the return 26
state
R codes 32
tax refunds 16
receipts 14
stock ownership 28–30
references to forms and worksheets 45
refunds
direct deposit of 24 T
state tax 16 tax
reject codes 46 alternative minimum (AMT) 40
rent paid on business property 18 and payments 21
rental & royalty income 16 -exempt interest 15
repair costs 18 on fuels (credit for) 16
resident state 34 -to-book difference 37
returns years (fiscal vs calendar) 13
consolidated 15 taxes and licenses 18
converting from another type 11 trial balance import 15, 34, 36, 53–61
fiscal and calendar year 13 troubleshooting the M-2 39
updating 11

U
S underpayment of estimated tax 23
Safe Harbor Elections 44 updating a prior-year return 11
salaries 17
SCH2 screen (for Schedule L) 35
Schedule A (Cost of Goods Sold) 14–15, 37 V
Schedule B (Additional Information for M-3 Filers) 39 vouchers 23
Schedule C (Dividends & Special Deductions) 15
Schedule E (Compensation of Officers) 44
Schedule G (Information on Certain Persons Owning the
W
Corporation’s Voting Stock) 45 wages 17
Schedule G (Schedule G (Information on Certain Persons
Owning the Corporation’s Voting Stock)) 28
Schedule K 28
Schedule K, line 13 30
Schedule K, line 3 28
Schedule K, line 4 28
Schedule K, line 5 29
Schedule K, line 7 29
Schedule K-1 30
Schedule L (Balance Sheet per Books) 34–37, 45

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lxviii Tax Year 2016