IRC Reg. Section 1.1368-2(a)(3)(iii) states that an S corporation can't reduce the AAA below zero by distributions to which IRC Section 1368 (b) or (c) apply. If the AAA already has a negative balance, these distributions can't further reduce AAA.
To have Lacerte follow these regulations automatically:
- Press Ctrl + O on your keyboard. Or click the Settings menu at the top of Lacerte, then select Options.
- Choose the Tax Return tab.
- Under Federal Tax Options, make sure that Distributions from AAA is set as Limited to Balance.
The program will reduce the accounts until either the distribution is absorbed, or all the different accounts become zero. If this option is set to Not Limited to Balance, all distributions will be taken against AAA, which could reduce it below zero if the distributions exceed the AAA balance.
Lacerte prints election statements for Schedule M-2 and AAA with the tax return, along with a shareholder consent statement to be signed by each affected shareholder for each election. The program also completes a worksheet reflecting the distribution allocations.
Refer to the Instructions for Form 1120-S for information about the order of distribution reductions and available elections for distributions.
Occassionally, a return only has an AAA account and the distribution exceeds the AAA. In this case, Lacerte does nothing with the balance that is disallowed. The preparer must decide how to treat the negative balance.