To complete the Accumulated Adjustments Account (AAA) for Form 1120S, Schedule M-2, follow these steps:
- Go to Screen 32, Schedule M-2.
- Enter the Beginning balance.
- If this client was transferred from a prior year, this amount should be carried over during the proforma process.
- Enter any Other additions to be included on Schedule M-2, Line 3.
- Income items on the Schedule K (other than Ordinary Income) flow to Line 3 automatically.
- Enter the Amount of Other Additions to carry to Schedule L.
- Amounts entered in Other Additions don't automatically flow to the calculation for retained earnings; enter the amount here to include it in the balance sheet calculation.
- Enter any Other reductions to be included on Schedule M-2, Line 5.
- Enter the Amount of Other Reductions to carry to Schedule L.
- Amounts entered in Other reductions don't automatically flow to the calculation for retained earnings; enter the amount here to include it in the balance sheet calculation.
- Enter an amount in Distributions other than dividends [O] to reduce the AAA if distributions from AAA are different from the amount entered in Property Distributions (Screen 8, code 101 or Screen 27, code 120).
- Enter -1 if the amount is zero. Lacerte carries this amount to Schedule M-2, Line 7, column (a).
- View the Accumulated Adjustments Account on Form 1120S, page 4, Schedule M-2.
Lacerte, by default, will limit distributions to the balance. It reduces AAA (determined without regard to any net negative adjustment for the tax year) for distributions, but not below zero, per the Schedule M-2 instructions and Reg. Section 1.1368–2. If you wish to not limit distributions to balance, enter a 2 in Distributions from AAA: 1 = limited to balance, 2 = not limited to balance [O] (code 118).
Additional information regarding the AAA
- The AAA includes the S corporation's operating income (loss) for the year from trade, business, passive, and nonpassive activities.
- An S corporation uses the AAA account to calculate the tax effect of distributions made by the S corporation coming from accumulated earnings and profits (E&P).
- The S corporation is required to establish a zero balance on the AAA account on the first day of its first tax year.
These items increase the Accumulated Adjustments Account
- All corporate income items (except tax exempt income) that are separately stated and passed through to the shareholders
- The ordinary income of the S corporation (non-separately stated income)
- Oil & Gas depletion deductions in excess of basis
These items decrease the Accumulated Adjustments Account
- Distributions by the S corporation which aren't required to be included in the shareholders income (return of basis)
- S corporation's loss and deduction items (except nondeductible items) that are separately stated and passed through to shareholders
- The ordinary loss of the S corporation
- Any nondeductible items that aren't related to the production of tax-exempt income
- The shareholders deduction for Oil & Gas depletion