Knowledge Base

14940: 1120 - EF Message 0042 Schedule M-2 is out of Balance

Fed Returns Generally

I am receiving red message 0042 about the unappropriated retained earnings being out of balance. How can this be corrected?

The first part of message 0042 states:

This message occurs when the Schedule L, line 25, column d, does not match the M-2, line 8. Line 25 of the Schedule L reports the amount of unappropriated retained earnings, and Schedule M-2 is the “Analysis of Unappropriated Retained Earnings,” which is calculated based on the information made available by the company’s books. Since both lines report the total unappropriated retained earnings, the amounts must match.

The message goes on to provide suggestions for what could be causing the issue, depending upon the situation:

If the return is in its final year:

If this is a final year return, see the Instructions for Form 1120 for more information on how the IRS expects a Schedule L to be completed. In general, the end of year amounts would be $0, since the company is technically considered to be ended by the end of the filing year.

If the amount on Schedule M-2, line 8 is correct, and line 25 of the Schedule L is incorrect:
  1. Turn off the auto-balance feature:
    • In Drake20, there is a global setup option to turn off auto-balance. If you want to turn off auto-balance globally for all returns, go to Setup > Options > Calculation & View/Print tab > Turn off auto-balance of the balance sheet. If this is not checked, turn off the auto-balance on a single return by going to the PRNT screen and checking the box Reverse autobalance setup option.
    • In Drake19 and prior, go to the PRNT screen and check the box Turn off autobalance.
    • When the auto-balance feature is turned on, and the assets section and liabilities and capital section on the Schedule L are not equal, the feature automatically adjusts the unappropriated retained earnings (line 25 of the Schedule L) by the difference between the two sections in order to make the sections equal, or balanced. 
  2. After turning off the auto-balance feature, return to View and see if line 25, column d, now matches line 8 of the M-2.
  3. If the amount on Schedule M-2, line 8 is correct, and the auto-balance feature has already been turned off, review the amounts on Schedule L. You may need to review the company’s books, the end of year information on the prior year’s return, and the calculations on the current year’s return in order to determine if an amount is missing or appears to be incorrect on the Schedule L. EF message 0042 provides specific suggestions for things to look for: 


If the amount on line 25 of the Schedule L is correct, and line 8 of the M-2 is incorrect, review the M-2:

  1. Line 1 of the M-2 comes from Schedule L, line 25, column b: the beginning of year unappropriated retained earnings. If line 25, column b, is incorrect, review the Schedule L - you may need to review the company’s books to determine if an amount is missing or was entered incorrectly (see step 3 of the previous section for suggestions).
  2. The rest of the EF message suggests which areas of the M-1 or M-2 may need to be reviewed:
  • ​Line 2 of the M-2 flows from line 1 of the Schedule M-1. If line 1 of the M-1 is incorrect, first see the Related Link: 1120 – Calculating Book Income, Schedule M-1 and M-3 for more information on how line 1 of the M-1 was calculated, and options for correcting it. This article may help you determine which reconciliation items on the M-1 need to be adjusted.
  • If lines 3, 5a, 5b, 5c, or 6 on the M-2 are incorrect, return to Data Entry and open screen M2. These reconciliation items are direct entry fields, so you can manually correct the amounts on these lines in Data Entry.
  • Rounding could be responsible for the mismatch. In these cases, you can use the fields on screens M1 and/or M2, as applicable to account for rounding. 

​For more information on preparing a schedule L, M-1, or M-2, see the Instructions for Form 1120.

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