What are some of the ways that distributions can be handled on the M-2?
Distributions on the Form 1120S, Schedule M-2 are handled differently for different scenarios. Distributions are not allowed to result in a negative amount for line 8, although line 8 can be negative due to operating losses. The distributions are allowed to the shareholder and are shown on Schedules K and K-1, however the AAA (Accumulated Adjustments Account) cannot become negative as a result of distributions. Please refer to Related Links below and the 1120S instructions. The examples that follow should help explain.
Example 1: Beginning balance of AAA is $-200, net adjustments (lines 2-5) is a positive $600 and distributions are $600. The distribution amount for line 7 is limited to the amount on line 6 ($400).
Example 2: Beginning balance of AAA is $0, net adjustments (lines 2-5) is a positive $600 and distributions are $600. The distribution amount for line 7 is the entire $600, as it does not exceed the amount on line 6.
Example 3: Beginning balance of AAA is $0, net adjustments (line 2-5) is a negative $600 and distributions are $600. The distribution amount for line 7 is $0. Line 1 is $0, Line 6 is $-600, thus distributions would result in a larger negative balance.
Example 4: Beginning balance of AAA is $200, net adjustments (line 2-5) is a positive $600 and distributions are $400. The distribution amount for line 7 is $400 (the entire amount) since it will not reduce line 8 below the amount on line 6.
Example 5: Beginning balance of AAA is $200, net adjustments (lines 2-5) is a negative $600 and distributions are $400. $200 of the distribution amount is allowed for line 7 as this is the positive balance of the AAA account at the beginning of the year.
Example 6: Beginning balance of AAA is $-200, net adjustments (lines 2-5) is a positive $600 and distributions are $200. The distribution amount for line 7 is $200.
Example 7: Beginning balance of AAA is $7,500, net adjustments (line 2-5) is a positive $71,000 and distributions are 81,000. The distribution amount is limited to the amount on line 6 - $78,500.
|
Line 1 - Balance at the beginning of the year |
(200)
|
0
|
0
|
200
|
200
|
(200)
|
7,500
|
|
Lines 2 - 5 |
600
|
600
|
(600)
|
600
|
(600)
|
600
|
71,000
|
|
Line 6 - Combine lines 1 through 5 |
400
|
600
|
(600)
|
800
|
(400)
|
400
|
78,500
|
|
Line 7 - Distributions |
400
|
600
|
0
|
400
|
200
|
200
|
78,500
|
|
Line 8 - Balance at the end of the year. Subtract line 7 from line 6 |
0
|
0
|
(600)
|
400
|
(600)
|
200
|
0
|