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11544: 1120S - Schedule M-2 Distributions


1120S Sub S Corporate

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.

Example 1 Example 2 Example 3 Example 4 Example 5 Example 6 Example 7
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


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