For S-Corps IRS Form 1120-S Schedule M-2 Accumulated Adjustment Account (AAA) does not necessarily need to match IRS Form 1120-S Schedule L mostly because Schedule M-2 is not a reconciliation of equity. Most astute IRS examiners are RARELY concerned if AAA is different from retained earnings on the 1120-S.
Is AAA account same as retained earnings?
As used in the United States, the Accumulated Adjustments Account (AAA) is an account that contains the net retained earnings of a corporation. It is often used by S corporations, it is an item on a corporation’s balance sheet that accounts for taxable income that are passed to stakeholders.
Do temporary differences affect AAA?
No. Book over tax expense timing differences do not affect shareholder basis. In other words, these are temporary differences. Many timing differences that are temporary (depreciation, deferred income, deposits, A/R) will sort themselves out to have the same affect on basis, at the end of the day.
Is unappropriated retained earnings cash?
Dividend distributions are paid out of unappropriated retained earnings. These dividends typically take the form of cash disbursements, but can also be additional shares, in which case they are defined as stock dividends.
What are retained earnings timing differences?
The last account, Retained Earnings Timing Differences, is used to track S Corporation book / tax timing differences. If you reconcile Schedule M-2 to Schedule L on a book basis, this account should never be used, and, therefore, there should be no amounts entered in the Timing Differences column in Screen Ms.
Can the AAA account be negative?
The Accumulated Adjustments Account Balance AAA can be taken negative by a loss, but not by a distribution. See Example 2 on page 2. (This favorable rule allows an S corporation to always be able to distribute the positive balance of the prior years ending AAA without it being taxed as a dividend.)
What’s the difference between retained earnings and AAA?
“The main difference (between retained earnings and AAA on the 1120-S) will be (due to) timing differences between book and tax (reporting obligations). For example, if the book depreciation is less than the tax depreciation, the retained earnings account on the balance sheet will be larger than the AAA balance.”
Can a negative AAA account result in capital gain?
The AAA account is a running balance of retained income and losses. The AAA account can have a negative balance if the S-corp have more losses than profits but that does not result in capital gain. Your only concern is if you have received “distributions” in excess of your basis.
How is retained earnings reconciled on a schedule?
The schedule is divided into four columns, which are designed to reconcile the accounts that affect a shareholder’s basis. Column A is for accumulated adjustments account (AAA); Column B is for shareholders’ undistributed taxable income previously taxed; Column C is for accumulated earnings & profits; and, Column D is for other adjustments.
Is it possible for a AAA rating to go negative?
The AAA may have a negative balance. However DISTRIBUTIONS cannot cause AAA to go below zero. Future earnings can make the AAA positive ONLY after the negative balance has been restored.
