M-2 "Allow distributions to go in excess of AAA" ???

[mli]

ATX has the following option: "Allow distributions to go in excess of AAA". (This allows AAA on Sch m2 to go negative as aresult of distributions.)  

But the IRS 1120S instructions, specifically say that you should decrease AAA (but not below zero) by distributions.

Under what circumstances would you use this option to "Allow distributions to go in excess of AAA"???

 

[jklcpa]

I'll take a shot, but am not entirely sure, but I think this could happen under the ordering rules with redemption distributions.  If you look at the ordering rules in 1.1368-2(5), the "ordinary" distributions can't take the AAA below zero, but I think a redemption can. The M-2 section for AAA distributions doesn't have separate lines to differentiate between the two types of distributions, so I'm guessing that this may be possibly why ATX has this option.   Maybe someone else that's had this situation will chime in.

[mli]

Interesting.  I will take a look at that.

I found this in the  ATX Knowledgebase says:  ( Are they suggesting that you ignore the 1120S instructions for M-2? Doesn't appear right.)

 

"How do I calculate Form 1120S, Page 5, Sch M-2, line 7, column (a) property distributions in ATX™."

      This problem can occur when you have not selected to Allow distributions to go in excess of AAA.

      To resolve the issue, do the following:
 

1. Go to form 1120S.
2. Select the Options tab.
3. Select the Allow distributions to so in excess of AAA check box.
4. Click Save.

 

 

[mli]

I guess my point here is that I  don't understand ATXs programming for the M-2 section. 

Why provide functionality for something that is almost never used?

Instead, why not provide functionality for something that occurs frequently. i.e.- a check box that reconciles retained earnings, when distributions would create negative AAA?

Seems like this would be easy to do and would be infinitely more useful.   

[Corduroy Frog]

Isn't there an option for reversing the order of when to invade the AAA?  I don't have ATX but maybe this is what is happening.

[Abby Normal]

There are certain circumstances where distributions can reduce AAA even if it's already negative. Possibly, if there were capital contributions during the year. I don't really know what AAA is for, so whatever happens with it, I just accept and move on.

[samingeorgia]

So at the risk of sounding uninformed, what do you do with distributions in excess of AAA? I have been showing the amount as loan to shareholders.

[Abby Normal]

There's an M2 reconciliation worksheet. Put the excess distributions in the adjustments column to reconcile it to Retained Earnings. Get rid of those fake loans, NOW.

[jklcpa]

9 hours ago, samingeorgia said:

So at the risk of sounding uninformed, what do you do with distributions in excess of AAA? I have been showing the amount as loan to shareholders.

If you, or any other readers, want a better understanding of how to handle distributions, you might start with this article from The Tax Advisor entitled "Determining the Taxability of S Corporation Distributions: Part I":

https://www.thetaxadviser.com/issues/2014/jan/nitti-jan2014.html

and this follow-up article published the next month, Part II, that deals with S corps with accumulated E&P:

https://www.thetaxadviser.com/issues/2014/feb/nitti-feb2014.html

[samingeorgia]

Thanks, Judy!!

[Abby Normal]

Great articles, Judy. I bookmarked them both. Should probably print them to PDF for reference.