Schedule L is the balance sheet per books that sits inside a business tax return: Form 1120 for C corporations, Form 1120-S for S corporations and Form 1065 for partnerships. It shows assets, liabilities and equity at the beginning and end of the tax year, and it has to agree with your books. Smaller businesses can often leave it blank: a corporation with total receipts and year-end total assets both under $250,000 skips it, as can a partnership that meets all four tests in Schedule B question 4.
Everything below comes from the IRS Forms 1120, 1120-S and 1065 for 2025 and the 1120 and 1065 instructions, as of October 2026. On the 1040 side there's no Schedule L any more, so if you've landed here from an old search about the standard deduction, that form is long gone.
Who can leave Schedule L blank
This is the question most small business owners ask first, and the answer differs by return type.
| Return | You can skip Schedules L, M-1 and M-2 if | Where you say so |
|---|---|---|
| Form 1120 (C corporation) | Total receipts (page 1, line 1a plus lines 4 through 10) and total assets at the end of the year are both less than $250,000 | Check 'Yes' to Schedule K, question 13 |
| Form 1120-S (S corporation) | Total receipts for the year and total assets at the end of the year are both less than $250,000 (this exemption covers Schedules L and M-1) | Check 'Yes' to Schedule B, question 11 |
| Form 1065 (partnership) | Total receipts under $250,000, total assets at year end under $1 million, Schedules K-1 filed and furnished on time, and no Schedule M-3 filed or required | Check 'Yes' to Schedule B, question 4 |
The partnership version is easy to trip over. It isn't enough to be small: if even one Schedule K-1 goes out late, the exemption on question 4 is gone for that year. A 'Yes' there also lets the partnership skip item F on page 1 and item L on each Schedule K-1.
What each side of the balance sheet holds
Form 1120's Schedule L has four columns: (a) and (b) for the beginning of the tax year, (c) and (d) for the end. Column (a) and (c) carry gross figures such as receivables or buildings, and (b) and (d) carry the net amounts after allowances and depreciation.
| Lines | Section | Examples |
|---|---|---|
| 1 to 14 | Assets | Cash, trade receivables less bad debt allowance, inventories, US government obligations, tax-exempt securities, loans to shareholders, buildings less depreciation, land, intangibles less amortization |
| 15 | Total assets | Column (d) of this line is the figure the rest of the return keeps referring back to |
| 16 to 21 | Liabilities | Accounts payable, notes payable in less than 1 year, other current liabilities, loans from shareholders, longer-term notes, other liabilities |
| 22 to 27 | Shareholders' equity | Preferred and common stock, additional paid-in capital, appropriated and unappropriated retained earnings, adjustments to equity, less treasury stock |
| 28 | Total liabilities and equity | Must equal line 15 |
The instructions add a few line-level rules worth knowing. Certificates of deposit count as cash on line 1. Line 5 takes state and local bonds whose interest is tax exempt, plus mutual fund shares that paid exempt-interest dividends. Line 26 collects items like unrealized gains on securities held available for sale and foreign currency translation adjustments, in parentheses if the total is negative.
Why the beginning and end columns have to match last year
Here's the insight people miss: Schedule L isn't a one-year snapshot. The beginning-of-year column should be last year's end-of-year column, and the IRS instructions for partnerships say that if total assets at the start of the year don't equal total assets at the close of the prior year, you attach a statement explaining the difference. A balance sheet that doesn't roll forward is one of the quickest ways for a return to look wrong.
The partnership rules also say assets can't be netted against liabilities or shown as negative numbers. If a partnership uses a tax-basis Schedule L and owns an interest in another partnership, it shows its adjusted basis as an asset and its share of that partnership's liabilities separately as a liability.
How Schedule L connects to M-1, M-2 and M-3
- Schedule M-1 reconciles book income to taxable income. It starts from net income per books, which should tie to the retained earnings movement on Schedule L.
- Schedule M-2 analyses unappropriated retained earnings, the same figure as Schedule L, line 25.
- A corporation with total assets of $10 million or more on the last day of the year files Schedule M-3 instead of M-1, and the M-3 instructions add further rules for Schedule L.
- Total assets from Schedule L, line 15, column (d), also go on page 1, item D, when the corporation has to complete Schedule L.
For partnerships that must file Schedule M-3, the Schedule L amounts have to come from the same financial statements used for M-3. If the partnership prepares non-tax-basis statements, Schedule L reports those figures too.
Practical steps before you fill it in
- Close your books for the year and print a balance sheet from your accounting software.
- Check last year's return and copy its end-of-year column into this year's beginning columns.
- Map each account to a Schedule L line, attaching statements for 'other' lines (6, 9, 14, 18 and 21 on Form 1120).
- Confirm total assets equal total liabilities plus equity.
- Reconcile book income to the return on Schedule M-1 or M-3, then fill in M-2.
If you're working through the whole return, the Form 1120 guide and the Form 1065 guide cover the pages around Schedule L, and the difference between a profit and loss statement and a balance sheet explains the two reports your accountant will ask for.
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The verdict
If your business is small, check the skip test before you spend an hour on Schedule L: plenty of corporations under $250,000 and partnerships meeting all four question 4 conditions don't need it at all. If you do need it, treat it as your books in IRS layout, not a separate exercise. Roll last year's closing figures forward, keep assets and liabilities gross, and make sure line 15 equals line 28 before anything else.
Larger corporations file a longer reconciliation of book and tax results, which the book-to-tax reconciliation guide explains.
Frequently asked questions
What is Schedule L on a tax return?
It's the balance sheet per books on Forms 1120, 1120-S and 1065, showing assets, liabilities and equity at the beginning and end of the tax year.
Who doesn't have to complete Schedule L?
A corporation whose total receipts and year-end total assets are both less than $250,000 and that checks 'Yes' on Schedule K, question 13. A partnership that meets all four conditions in Schedule B, question 4, can also skip it.
Does Schedule L have to match my books?
Yes. The IRS instructions say the balance sheets should agree with your books and records, and partnerships attach a statement explaining any differences.
What if beginning assets don't match last year's ending assets?
For partnerships, the instructions say to attach a statement explaining the difference between this year's beginning total assets and the prior year's closing total assets.
Is there a Schedule L for Form 1040?
Not any more. Today's Schedule L belongs to business returns such as Forms 1120 and 1065.
