Who Is Not Required to File Schedule M2?
Schedule M-2 is a section of IRS Forms 1065 and 1120S used to reconcile changes in a partnership’s or S corporation’s capital accounts during the tax year. It tracks contributions, distributions, and the allocation of income or loss to each partner or shareholder. However, not every business is required to complete this schedule.
Partnerships and S Corporations with Simpler Returns
Partnerships and S corporations that meet certain criteria may be exempt from filing Schedule M-2. Specifically, if the business qualifies for the IRS’s reduced reporting requirements, it may not need to complete Schedule M-2.
Who Typically Does Not Need to File Schedule M-2?
- Partnerships Eligible for Simplified Reporting: A domestic partnership is not required to file Schedule M-2 if it meets all of the following:
- Total assets at the end of the year are less than $250,000
- Gross receipts for the tax year are less than $250,000
- The partnership is not required to file Schedule M-3
- The partnership is not a tax shelter
- These partnerships often only need to complete Schedule L and Schedule M-1, or may be exempt from filing those as well depending on their financial thresholds.
- S Corporations Meeting Simplified Thresholds: An S corporation is not required to file Schedule M-2 if:
- It has total receipts under $250,000
- Its total assets at the end of the tax year are under $250,000
- It is not required to file Schedule M-3
- It has no foreign activities or complex equity structures
- Disregarded Entities and Sole Proprietorships: Schedule M-2 is not used by sole proprietors or single-member LLCs taxed as disregarded entities. These types of businesses file Schedule C with Form 1040 and do not track partner capital accounts.
Why It Matters
Knowing whether you are exempt from Schedule M-2 can save time and reduce the complexity of your tax filings. However, it’s important to review the IRS instructions for Form 1065 or 1120S carefully or consult a tax professional to ensure compliance.
Final Thought
If your business has relatively simple financial activity and stays under the IRS reporting thresholds, you may not be required to file Schedule M-2. But if your entity grows or becomes more complex, this requirement can change. Always evaluate annually to stay up to date.
If you are unsure, reach out to Dimov Tax today. Our dedicated team is ready to present professional aid.