This article will help you understand how Intuit ProConnect calculates AAA distributions in the S-Corporate module.
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 ProConnect follow these regulations automatically:
- Go to the Input Return tab.
- From the left of the screen, select Balance Sheet, M-1, M-2, M-3 and choose Schedule M-2.
- Locate the Accumulated Adjustments Account (Schedule M-2) section.
- Enter a 1 in Distributions from AAA: 1=limited to balance, 2=not limited to balance [Override].
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 2= not limited to balance, all distributions will be taken against AAA, which could reduce it below zero if the distributions exceed the AAA balance.
ProConnect 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, the program does nothing with the balance that is disallowed. The preparer must decide how to treat the negative balance.