What are some of the ways that distributions can be handled on the M2?
Distributions on the Form 1120S, Schedule M2 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 K1, 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 25) 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 25) 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 25) 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 25) 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 25) 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 25) 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 25) 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
